UPDATE 1-Seven & I shares sink on big Q1 profit decline
*Seven & I falls as much as 8 pct on quarterly results
*Investors concerned about dismal supermarket operation
*Tough time expected to continue for retailers (Adds comments, updates with closing share price)
TOKYO, July 3 (Reuters) - Shares in Seven & I Holdings (3382.T) tumbled on Friday after it booked a sharper than expected decline in its first-quarter profit as Japan's recession hit sales at its supermarkets and department stores.
Marking the start of the earnings reporting season, Japan's largest retailer said operating profit fell 17.5 percent in the three months ended in May -- a result which also hit other retail stocks such as rival Aeon (8267.T). [ID:nT83976]
"It's negative as we had expected a single-digit profit decline," Kazunori Tsuda, an analyst at Daiwa Institute of Research, wrote in a note to clients. With consumers deferring purchases of clothes as well as more expensive items to cope with tough times, profits at Seven & I's supermarket division fell by more than half, while profits for its department store division plunged 82 percent.
Earnings by its Seven-Eleven convenience stores, which account for three-quarters of its operating profit, fell 3.2 percent, helped as smokers were driven to its stores by a law requiring an ID card to buy cigarettes from vending machines.
SUPERMARKETS' STRUGGLE
Investors were especially concerned about the surprisingly big profit fall in the company's supermarket operation, which includes about 180 Ito-Yokado stores.
"I didn't expect the supermarket operation to be that bad," said Kenichi Koyama, a fund manager at Fukoku Capital Mangement.
Seven & I, which kept its full-year forecast of 1.1 percent growth in operating profit, had expected profit at its supermarkets to grow 31 percent this financial year.
But its cost-cutting efforts have been unable to offset sharp falls in sales and its profit margin has been hurt by markdowns. Seven & I's struggle is likely to continue in the second quarter amid intensifying price competition among supermarkets and in the absence of a boost from its convenience stores.
Ito-Yokado and Aeon have been slashing prices and expanding offerings of cheaper own-brand items to lure back shoppers but have failed to stem the sales decline.
The tough spending environment has also prompted retailers to take a more drastic approach to overhauling their operations, converting unprofitable supermarkets into discount grocery stores.
Seven & I shares ended down 5 percent at 2,190 yen, becoming the third-biggest drag on the benchmark Nikkei average .N225, which fell 0.6 percent. Continued...
