UPDATE 3-Australia's David Jones leaps after profit upgrade

(Adds CEO comment on outlook, updates shares)

By Mark Bendeich

SYDNEY, Aug 14 (Reuters) - Australian upmarket department store David Jones Ltd (DJS.AX) raised its second-half profit forecast on Thursday and reassured investors it could withstand a general sales downturn, sending its shares 11 percent higher.

David Jones shares touched a five-month high after the 36-store national chain predicted 20-25 percent profit growth for the six months ended July and stuck with its guidance of 5-10 percent earnings growth for 2008/09.

"It's a very good quality result," said Martin Duncan, fund manager at Fortis Investment Partners, pointing to the company's ability to grow profit margins despite a slump in sales growth.

"They have worked to clear their inventory at a difficult time and have worked to maintain their profitability rather than chase market share."

Australian retail sales began to turn down in the June quarter, according to economic data, putting a cloud over the listed retail sector as consumers struggled to cope with high interest rates and rising food and fuel prices. [ID:nSYD4423]

David Jones, giving an update on its fourth quarter ended July, said it managed 0.8 percent growth in same-store sales over the three months, a sharp slowdown from 2.3 percent growth in the third quarter and 7.6 percent in the second.

But it said it was still set to generate earnings growth of 20-25 percent for the second half and 5-10 percent growth in all of 2008/09, despite bracing for a long stretch of weak sales.

"We have planned for two to three quarters of flat to negative sales growth," David Jones Chief Executive Mark McInnes told reporters on a conference call, making clear he was referring to like-for-like store sales.

David Jones expects to make second-half after-tax profits of A$46-A$48 million ($40-$42 million), taking the annual 2007/08 profit to A$135-$137 million. Analysts had forecast around A$132 million in 2007/08 net profit, before exceptional items.

"We were anticipating a slowdown and had started planning for it more than 18 months ago," McInnes said, adding the firm moved quickly to reduce stocks and protect its gross profit margin.

He said the margin had grown about 10 basis points in the second half, from a year earlier, putting David Jones on track to maintain around 40 percent margins throughout 2008/09 to 2011/12.

"We believe our company has a bright future and that we are well positioned to continue our track record of delivering year-on-year growth in shareholder returns...," McInnes said.

Shares in David Jones, which mainly competes with the larger, private equity-owned Myer chain, have fallen 28 percent this year despite Thursday's bounce-back to levels not seen since March.

But the stock has outperformed the merchandise-retail sector index .AXRTK, which has slumped 37 percent this year. David Jones shares were up 8.8 percent at A$3.97 at 0256 GMT. ($1=A$1.14) (Editing by Ian Geoghegan)