Sainsbury sees recovery signs

By Mark Potter

LONDON (Reuters) - Grocer J Sainsbury (SBRY.L) posted a forecast-beating 19 percent rise in first-half profit and said it saw signs of a pick-up in spending, though industry growth would be curbed by lower food price inflation.

Chairman David Tyler played down speculation the company's biggest shareholder, the Qatar Investment Authority (QIA), might make a fresh takeover bid after a failed attempt in 2007.

"There's no suggestion whatsoever that it (QIA's attitude) has changed from what it has been over the last 12 or 18 months, which is wishing this business well and being a long-term shareholder," he told reporters on Wednesday.

Sainsbury, Britain's third biggest grocer behind Asda (WMT.N) and market leader Tesco TSCO.L>, said profit before tax and one-off items rose to 307 million pounds in the 28 weeks to October 3, beating the average forecast for 301 million in a Reuters poll.

Growth was driven by an 800,000 increase in weekly customer transactions to 18.5 million, as well as strong sales of non-food ranges and tight cost management.

Chief executive Justin King also fleshed out Sainsbury's plan, announced with a 432 million pound equity fundraising in June, to accelerate growth by expanding outside its stronghold in the south and east of England and into more non-food ranges.

The group expected to create 10,000 jobs in the two years to March 2011, he said.

"What comes through is how much the model has developed over the last five years and the opportunities that lie ahead whether in food, new space, non-food or online," said RBS analyst Justin Scarborough, keeping a 'buy' rating on Sainsbury shares.

At 3:45 p.m., the shares were up 3.4 percent at 338.7 pence, outperforming a 0.1 percent rise on the DJ Stoxx European retail index .SXRP.

Some analysts, however, were concerned by data from market researchers TNS and Nielsen which showed Sainsbury's growth slowing versus industry leader Tesco (TSCO.L) and far behind upmarket rival Waitrose JLP.UL.

"Although the interim results came in at the top end of expectations there will be some nervousness arising from the company's recent sales performance," said Seymour Pierce's Freddie George.

Asda was due to report third-quarter sales on Thursday.

A STRONG CHRISTMAS

King said it was too early to know whether a sustainable economic recovery was taking hold and sales growth at grocers would be held back by falling food price inflation.

Food price inflation would be negligible in the second half, though deflation was unlikely, he told reporters, echoing comments from rivals like Tesco.