UPDATE 3-Australia's Woolworths sales up, outlook cautious

* Maintains sales forecast, cautious on outlook

* First-quarter sales excluding petrol up 7.4 pct

* Sales at Big W and Dick Smith solid

* Shares slip 1.0 pct, underperform main index

(Adds CEO interview, graphic)

By Victoria Thieberger

MELBOURNE, Oct 20 (Reuters) - Woolworths Ltd (WOW.AX), Australia's largest supermarket chain, reported a slowdown in sales growth on Tuesday, raising some doubts over whether its costly store refurbishments are delivering adequate returns.

Woolworths said its first-quarter sales rose 4.2 percent, slower than previous quarters, and that it remained cautious on the outlook for spending for the full year.

The stock fell 1.0 percent, despite the broader market being up 1.3 percent, as some analysts questioned the retailer's costly supermarket refurbishment programme.

"They should have done a bit better in the food and liquor division," said BT Investment Management analyst Sondal Bensan.

"They have spent a lot of money investing in refurbishing their stores to the 2010 format, it should be giving them a pretty significant benefit," he said.

Total sales including petrol rose 4.2 percent to A$13.4 billion in the quarter ended Oct. 4.

Core sales in Australian food and liquor rose 5.8 percent at stores open for more than a year, below the 7.9 percent pace in the fiscal fourth quarter as government cash handouts ended and the rate of food inflation slowed.

Inflation rose by 2.1 percent in the first quarter, compared with 4.0 percent in the fourth quarter, as fresh-food prices declined and the stronger Aussie dollar kept down import costs.

For a graphic on sales, click on

here

SPENDING WILL SLOW

Woolworths maintained its sales forecast of growth between 5-10 percent in the current fiscal year, excluding petrol.

Excluding petrol, first-quarter sales rose 7.4 percent.

Latest economic figures show that retail sales, which account for about 23 percent of Australia's A$1.1 trillion economy, rose 0.9 percent in August after two months of falls.

Still, Woolworths Chief Executive Michael Luscombe warned that consumer spending would not match last year's levels when it was helped by massive government spending that helped Australia to avoid a recession.

He said rising interest rates, petrol prices and the unemployment rate would also bear watching.

Woolworths is not the only Australian retailer to be wary about the consumer spending outlook. David Jones (DJS.AX), the country's No.2 department store, last month disappointed investors by keeping a cautious outlook ahead of the Christmas shopping season.

"It would be irresponsible to have a very upbeat forecast because there are still some unknowns we need to experience," Luscombe told analysts.

Later, he told Reuters in an interview that Australian food and liquor sales were growing at a similar pace early in the second quarter as in the first quarter.

"It has pretty much maintained its momentum," he said in a telephone interview.

Luscombe also said that Woolworths' business venture with TATA in India planned to add 12 new stores between now and the end of the fiscal year in June 2010, in addition to the existing 34 retail stores operating under the Croma brand.

Sales in India jumped 57 percent in the first quarter to A$63 million.

He said an inquiry by the competition regulator into Woolworths' plans to buy hardware chain Danks DKS.AX was just the regulator doing its job.

Woolworths's expansion plans into home hardware have raised concerns at the Australian Competition and Consumer Commission, which said on Friday the deal could reduce competition at the retail level by reducing the number of wholesale suppliers.

Woolworths plans to challenge market leader Bunnings, owned by Wesfarmers (WES.AX), as it looks for new avenues of growth.

Woolworths, which also owns electronics chain Dick Smith and discount department store Big W, in August forecast profit growth of 8-11 percent for the current fiscal year, below last year's 12.8 percent growth.

Sales at Big W rose 5.8 percent in the first quarter and consumer electronics jumped 13.2 percent after an overhaul of Dick Smith stores. (Editing by Dhara Ranasinghe and Valerie Lee)