Sainsbury H1 profit seen up 16 percent

By Mark Potter

LONDON (Reuters) - J Sainsbury, Britain's third-biggest grocer, is expected to post a 16 percent rise in first-half profit on Wednesday and flag a tougher second half amid falling food price inflation and stiff competition.

Third-quarter figures from Asda, owned by U.S. retailer Wal-Mart Stores Inc), on Thursday are also likely to show another strong performance from Britain's second-biggest grocer, though it may also be feeling the effect of lower food price inflation.

Rising grocery prices have boosted sales at Britain's grocers for over a year. But food price inflation slowed to 1.6 percent in September, the lowest annual increase since May 2006, raising fears of the deflationary pressures which have hit grocers in the United States and France.

Sainsbury, which runs over 500 supermarkets and around 300 convenience stores, is expected to report profit before tax and one-off items of 301 million pounds for the 28 weeks to October 3, according to a Reuters poll.

Forecasts ranged from 296-308 million pounds.

The operating margin was expected to rise by 12-30 basis points, helped by stronger sales and a smaller proportionate contribution from lower-margin petrol sales.

Last month, Sainsbury reported a 5.4 percent rise in second-quarter sales at stores open at least a year, excluding fuel and VAT sales tax, down from a 7.8 percent increase in the first quarter.

Analysts expected weaker sales and profit growth in the second half as food price inflation falls and Sainsbury invests in its expansion plan which include new shops, store extensions and a recently-launched online non-food business.

Full-year underlying profit is forecast up 8 percent to 588 million pounds, according to Thomson Reuters I/B/E/S data.

As well as a resurgent Tesco, Sainsbury faces growing competition from upmarket grocery chain Waitrose which is achieving market-leading growth rates following the launch of its "essentials" value range.

"Sainsbury may have to find itself having to run harder to stand still and this may limit its margin upside for now," Barclays Capital analysts said in a research note.

Sainsbury shares have underperformed the DJ Stoxx European retail index by 15 percent this year, as investors focussed on more cyclical stocks on hopes of economic recovery.

However, the shares have been helped in recent weeks by bouts of speculation that its biggest investor, the Qatar Investment Authority, might make a renewed bid after dropping a previous takeover attempt in 2007.

Asda was due to report third-quarter sales on Thursday. In the second quarter, its like-for-like sales excluding fuel and VAT rose 7.2 percent, down from an 8.4 percent increase in the prior quarter.

(Editing by Dan Lalor)