UPDATE 2-Cost cuts help Germany's Metro counter weak sales
* Q2 adj EBIT 276 mln euros vs poll avg 269 mln
* Cash and carry unit beats expectations
* Q2 sales 15.3 bln euros, in line with forecast
* Shares rise 7 percent to top retail index (Adds CEO, analyst comments, shares, detail, background)
FRANKFURT, Aug 1 (Reuters) - German retailer Metro AG posted a smaller than expected fall in second-quarter earnings as cost cutting at its main cash and carry business cushioned sluggish sales across its recession-hit European markets.
Shares in the group, which also runs supermarkets, department stores and Europe's biggest consumer electricals chain, jumped to a 16 month high on Thursday after it kept financial targets for its shortened 2013 business year.
"People had quite low expectations, so although the overall results were a net neutral, the lack of disappointment looks to have squeezed some of the shorts," Exane analyst Andrew Gwynn said, referring to investors that had sold the stock in anticipation of buying it back at lower levels.
European retailers are mostly struggling in flagging economies, with consumer spending under pressure from rising prices, muted wages growth and high unemployment. ID:nL6N0FO0G7]
Retail sales in Germany, Europe's largest economy, fell by the most this year in June, while France missed expectations for a rise and in Spain retail sales fell for the 36th month running, data published on Wednesday showed.
Metro said second-quarter earnings before interest, tax and special items (EBIT) fell 12 percent to 276 million euros ($367 million). However, that was better than the average forecast of 269 million in a Reuters poll of analysts.
The cash and carry business, which makes up over 45 percent of group sales, provided the main surprise, raising hopes that Chief Executive Olaf Koch, who has taken direct control of its struggling stores in Germany, is starting to turn it around.
Koch has cut costs and prices and is shrinking non-food ranges, where cash-strapped customers have cut spending most, with the aim of focusing them more on core clients such as hotels, restaurants, caterers, butchers and bakers.
"They've made some slow and steady progress," said Exane's Gwynn, who has an 'underperform' rating on the stock.
"Maybe they need to go a bit quicker but they are lacking the financial room to move, given that improving the situation would probably take quite a lot of margin investment."
The cash and carry business reported second-quarter EBIT before special items of 241 million euros, beating analysts' expectations for 222 million euros, with sales at outlets open over a year falling 0.9 percent. That compared with a 1.7 percent decline in underlying sales in the first quarter.
The good news at cash and carries, however, was offset by a bigger-than-expected loss at Metro's Media-Saturn electricals chain, where it is cutting prices to cope with online competition.
Metro confirmed its group target for operating profit to fall and sales to increase moderately during its shortened 2013 business year ending September, but when questioned, said that Media-Saturn may not reach its target for flat operating profit.
"But we believe the risk there will be compensated with the improvements that we've seen at cash and carry in the second quarter," Koch said.
Second-quarter group sales totalled 15.3 billion euros, down 0.5 percent on a like-for-like basis and in line with forecasts.
At 1215 GMT, Metro shares were up 7 percent at 27.745 euros, topping an index of European retailers.
Metro said income from the closing of a sale in Russia had been enough to offset provisions of around 30 million euros made in connection with the insolvency of its former subsidiary Praktiker. The home improvements chain was spun out of Metro in 2005, but Metro is still the landlord to 40 Praktiker stores in Germany.