UPDATE 3-Australia's Woolworths to sell Dick Smith electronics

Mon Jan 30, 2012 10:48pm EST

* Has received approaches for Dick Smith chain

* Q2 like-for-like Australia food, liquor sales up 1.1%

* Rival Coles steps up price war

* Woolworths shares jump 2.8% (Adds investor, CEO comments)

By Sonali Paul

MELBOURNE, Jan 31 (Reuters) - Woolworths, Australia's top supermarket chain, plans to sell its struggling Dick Smith electronics chain, it said on Tuesday as it missed market forecasts for food and liquor sales growth in the second quarter.

The move to cast off Dick Smith, suffering against no-frills chain JB Hi-Fi, and a reiteration of the group's forecast for 2-6 percent annual profit growth helped send Woolworths shares up as much as 2.8 percent in a fairly flat broader market.

"There was some concern in the market that Woolworths might reduce its guidance...It's probably slightly positive just because they didn't change their guidance," said Martin Duncan, who helps manage A$3 billion in funds at Arnhem Investment Management.

Woolworths said it had received a number of approaches for Dick Smith, which Citi values at A$190 million ($201 million), since announcing a review of the business last November and has tapped boutique firm Greenhill Caliburn to advise on the sale.

"It's good to see management taking an inevitable decision to exit an underperforming segment," said Peter Esho, chief market analyst at broker City Index. Private equity firms would be the most likely bidders for Dick Smith, he said.

As of last year, Woolworths had Dick Smith, which accounts for about 3 percent of group sales, on its books at A$419 million.

It plans to take a A$300 million charge to cover the costs of closing up to 100 weaker Dick Smith stores, or nearly a quarter of the chain, over the next two years and writing down goodwill.

Woolworths Chief Executive Grant O'Brien said it was hard to predict how soon the company would sell the electronics chain.

"We're not in the process of a fire sale here," he told analysts and reporters on a conference call, declining to say how many approaches the company had received.

First-half sales at Dick Smith rose 0.7 percent to A$731 million ($773 million). The business last year achieved earnings of just A$17.8 million on sales of A$1.29 billion for a margin of 1.4 percent, well below the group's overall margin of 6 percent.

Woolworths reported second-quarter Australian food and liquor sales from its nearly 1,000 stores around the country open for more than a year grew 1.1 percent, which was below six analysts' forecasts for growth around 1.4 percent.

The company has warned since last August that it expected a challenging year to June 2012 with food prices falling, shoppers spending less and competition heating up against arch rival Coles, owned by Wesfarmers.

"The trading environment has remained tough with continuing deflation across key product categories combined with a continued cautious consumer," Tjeerd Jegen, Woolworths' director of Australian supermarkets and petrol, said in a statement.

Coles stepped up the battle against Woolworths this week, announcing it would slash fruit and vegetable prices by up to 50 percent, following price wars on essentials like milk, bread and toilet paper over the past year.

O'Brien shrugged off the latest campaign at Coles, saying deflation was driving cuts in fresh food prices and he expected that to continue through the current quarter.

Total sales at Woolworths for the first half of the fiscal year to June 2012 rose 5 percent to A$29.7 billion.

The company said its earnings guidance excludes the A$300 million charge it is taking on the Dick Smith restructuring. ($1 = 0.9460 Australian dollars) (Reporting by Sonali Paul; Editing by Richard Pullin)

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