Sainsbury Q1 Underlying Sales Up

By Mark Potter

LONDON (Reuters UK) - J Sainsbury posted second-quarter sales towards the top end of forecasts, but its shares fell on talk of a stake sale by a major investor and concerns over shoppers switching to cheaper ranges.

Shares in Britain's third-biggest supermarket group fell as much as 17.9 percent to a four-year low of 258.5 pence on Wednesday as traders reported talk that entrepreneur Robert Tchenguiz was selling his approximate 10 percent stake.

Sainsbury and a spokesman for Tchenguiz declined to comment.

Sainsbury said like-for-like sales excluding fuel, a key industry growth measure, rose 4.3 percent in the 16 weeks to October 4, driven by demand for cheaper own-brand goods and family ready meals as cash-strapped shoppers try to save money.

Forecasts ranged from 2.75 percent to 4.7 percent, with an average of 3.9 percent, in a Reuters poll of nine analysts.

"Normally I would expect the stock to open strongly... following a statement like this," said Morgan Stanley analyst Nicole Quinn.

"However the trading statement can do nothing to dispel market concerns that Robert Tchenguiz may have to place his 7-percent-plus stake hurriedly as a result of the problems in the Icelandic banking system."

Newspaper reports have named Icelandic bank Kaupthing, which has received 500 million euros (388 million pounds) of central bank money as the Atlantic island seeks to shore up its banking system, as one of Tchenguiz's biggest backers.

Traders said Kaupthing had placed 168 million shares, just under 10 percent of Sainsbury's share capital, at around 250 pence apiece. By 12:04 p.m., the shares had pared their losses to trade down 4.4 percent at 301 pence.

UPBEAT ON CHRISTMAS

Sainsbury, which runs more than 800 supermarkets and convenience stores, said sales of its budget "basics" range rose around 30 percent in the second quarter, while offers such as a ready meal for four for 4.99 pounds were also selling strongly as shoppers cut back on eating out and "takeaway" meals.

But Chief Executive Justin King was optimistic they would trade back up to more expensive items for Christmas.

"We think quality food will be a big part of Christmas," he said on a conference call with analysts, adding that early sales of Christmas gifts and biscuits had been strong.

King said food-price inflation at Sainsbury was around 5-6 percent, while volumes fell slightly in the second quarter.

"The economic environment remains particularly challenging and we expect this to continue throughout the second half, but we have developed the Sainsbury's offer to perform in these conditions," he said in a statement.

Sainsbury is associated with higher prices and also higher quality than many of its rivals, and data from researchers TNS WorldPanel suggests it has, with market leader Tesco, lost ground to rivals more associated with lower prices such as Asda

and Morrison and discounters Aldi and Lidl.

Britons are curbing spending amid higher food and fuel costs, diving house prices and increasing economic uncertainty.

"We think Sainsbury has fared extremely well so far this year given the circumstances," JP Morgan analysts said in a research note. "It is overtly the most 'high end' of the big four UK grocers but has delivered better like-for-like growth across the first half of the year than Tesco."

Last week, Tesco posted a 4 percent rise in like-for-like sales excluding fuel for its latest trading period, while Morrison reported an 8.2 percent increase last month. But differences in the timing and length of the trading periods mean that none of the figures is directly comparable.

Some analysts remained concerned, however, that Sainsbury would suffer as rivals step up their promotions. Tesco launched a new low price range of products last month under the banner "Britain's Biggest Discounter."

Shore Capital analyst Clive Black said Sainsbury's trading update "includes a litany of evidence that consumers are trading down," which he thought could hit profit margins.

He cut his full-year profit forecast to 525 million pounds ($916 million) from 550 million.

Sainsbury is 27 percent-owned by the Qatar Investment Authority (QIA) and is a perennial source of bid speculation. The QIA dropped plans for a bid at 600 pence a share last year.

(Additional reporting by Dominic Lau; Editing by Quentin Bryar and Elaine Hardcastle)