UPDATE 5-Seven & I to shut some supermarkets; H1 profit slides

* H1 profit drops 20 pct

* To close nearly 30 of its supermarkets

* Department stores and supermarkets remain drag on earnings

* Full-year op profit forecast kept at 250 bln yen

* Shares up 1.2 pct on restructuring news ahead of results (Adds convenience store chain results in paragraphs 16 & 17)

By Taiga Uranaka

TOKYO, Oct 1 (Reuters) - Japan's largest retailer, Seven & I Holdings (3382.T), is stepping up restructuring of its struggling supermarkets, seeking to return to profit growth next year after suffering a sharp fall in first-half earnings.

Anticipating prolonged weak consumer spending, the company said it is considering closing nearly 30 supermarkets, or 16 percent of its Ito-Yokado stores, which have been performing poorly despite its attempts to turn them around.

Seven & I is the first to report earnings among Japan's major retailers, which remain in a slump even as the country's economy crawls out of a recession, with record deflation and rising job losses dampening hopes for a speedy recovery.

Department stores and supermarkets are among the hardest hit, as a growing number of thrifty consumers cut back spending on non-daily items like clothes and seek out bargains, bolstering sales of cheap specialty chains such as casual apparel retailer Uniqlo, a unit of Fast Retailing (9983.T).

"The market on the whole likely saw the worst last year, when conditions were pretty bleak," said Shun Tanaka, chief analyst at SMBC Friend Research Center Ltd. "But prices are still falling, and sales could continue to slide for another six months to a year."

Seven & I kept a recently revised-down forecast and President Noritoshi Murata said the retailer aims to secure profit growth in the next financial year through cost-cutting measures.

"The tough situation is likely to continue through the first half of the next year," Murata told a news briefing.

'SCRAP AND BUILD'

Seven & I, the operator of Seven-Eleven convenience stores, has been trying to revamp its department stores and supermarkets, which account for more than half of the group's sales, by expanding cheap store brand items and converting unprofitable locations to discount stores.

But they continued to be a drag on the retail conglomerate's profits in the March-August period, with operating profit at 118.14 billion yen ($1.3 billion), down 20 percent from a year earlier.

The company has over 12,000 Seven-Eleven convenience stores in Japan and runs or licenses out thousands more overseas.

For the full-year ending in February, the company kept its forecast of 250 billion yen operating profit, down 11 percent from a year earlier and in line with a mean forecast of 249 billion yen in a poll of 17 analysts by Thomson Reuters I/B/E/S. [ID:nT74966]

Analysts are calling for more drastic restructuring for supermarkets, which sell groceries, clothing and houseware goods, as customers continue defecting to cheap specialty chains.

"The dominance of general merchandising stores is nearing an end as major retailers and specialty stores step in to take their place," said Takayuki Suzuki, a retail analyst and head of Primo Research Japan, referring to Seven & I's supermarkets and rival Aeon Co Ltd's (8267.T) Jusco stores.

"They need to close down the stores with poor sales in regional Japan and focus on the bigger stores," said SMBC Friend's Tanaka. "They need to scrap and build."

Japan's supermarket same-store sales fell for a ninth straight month in August, down 3.4 percent from a year earlier, data from the Japan Chain Stores Association shows.

For a graphic, click on the link below:

here

CONVENIENCE STORES SUFFER

Convenience stores, which had enjoyed solid sales last year, are also starting to feel the pain of the retail slump, with Seven-Eleven Japan, Japan's No. 1 convenience chain, suffering a profit decline for the first half.

No. 3 chain FamilyMart Co Ltd (8028.T) cut its full-year operating profit outlook by 11 percent to 32.7 billion yen, saying an unusually cool summer coupled with a weak spending trend hurt sales of seasonal items such as cold drinks and ice-cream.

Seven & I shares have tumbled 30 percent this year, underperforming a 15 percent rise in the Nikkei average .N225.

The shares closed up 1.2 percent prior to the announcement, outperforming the benchmark Nikkei average's .N225 1.5 percent decline, on news that it was considering closing the supermarkets. ($1=89.86 Yen) (Additional reporting by Colin Parrott, writing by Mayumi Negishi; Editing by Joseph Radford and Muralikumar Anantharaman)