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UPDATE 5-Charity event helps UK's Sainsbury defy downturn

Published 03/25/2009, 09:41 AM
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* Q4 underlying sales up 6.2 pct vs mean forecast of 5.5 pct * Biggest quarterly underlying sales rise for 2-1/2 years

* Comic Relief busiest week after Christmas, boosts sales

* Expects economic environment to remain challenging

* Shares fall as much as 3 pct, trimming recent gains (Adds more detail, updates shares)

By Mark Potter

LONDON, March 25 (Reuters) - J Sainsbury Plc posted its best quarterly sales growth for 2-1/2 years, defying the economic downturn thanks to strong own-brand sales, innovative promotions and a boost from its support of a major charity event.

Britain's No.3 grocer, which sold 6.8 million trademark red noses and other merchandise for the Comic Relief appeal on March 13, said on Wednesday it attracted 19 million shoppers around the week of the event, more than any time outside of Christmas.

Chief Executive Justin King said the 140-year-old group was also starting to improve its price perception with consumers, something which analysts have feared could hold the company back as the recession deepens.

"It is very possible that Sainsbury could be entering a sustained period of like-for-like (sales) outperformance," Morgan Stanley analysts said in a research note.

Sainsbury, with more than 500 supermarkets and over 275 convenience stores, said sales at shops open at least a year rose 6.2 percent excluding fuel in the 11 weeks to March 21, the final quarter of its financial year.

That was up from 4.5 percent in the third quarter and beat analysts' average forecast of 5.5 percent in a Reuters poll.

Sainsbury estimated the extra footfall associated with Comic Relief added 0.3 percentage points to sales.

The biennial appeal has raised almost 60 million pounds ($88 million) and King said Sainsbury, the event's biggest corporate partner, contributed "a significant amount" by buying merchandise and donating profits on their sale.

HIGHER PRICES

Sales were also helped by higher food prices, although King said inflation only contributed about 3 percent to growth -- well below the official reading of 11.5 percent -- as shoppers avoided the most-affected goods and cherry-picked promotions.

Cash-strapped shoppers drove a rise of over 60 percent in sales of the firm's cheapest "basics" range, though demand for its higher welfare "Freedom Food" also held up as it attracted customers from upmarket rivals like Marks & Spencer.

Adjusted for the recent, temporary reduction in value-added sales tax, underlying sales rose 7 percent, the highest increase in over ten years.

"A fabulous performance," said Shore Capital analyst Clive Black, and Sainsbury Finance Director Darren Shapland said he expected analysts' full-year consensus profit forecast of 525 million pounds ($770 million) to nudge up a couple of percent.

Sainsbury's shares, however, which had risen as much as 14 percent over the past two weeks, were down 2.1 percent at 323.75 pence by 1315 GMT, with some analysts saying the good news was already priced in.

Sainsbury's shares trade at 15.8 times forecast earnings, above rival Morrison on 13.9 and market leader Tesco on 11.6, according to Reuters data.

UNIVERSAL APPEAL

Sainsbury has defied predictions it would suffer in the economic downturn from its mid-market positioning, taking custom from upmarket rivals while holding onto value-focused shoppers with innovative campaigns like "feed your family for a fiver" and "love your leftovers".

"We expect the current economic environment to remain challenging but our focus on delivering universal appeal through great products at fair prices means we are well positioned to continue our good progress," it said in a statement.

Sainsbury's growth has outstripped Tesco, which posted a 2.5 percent rise in underlying sales for the seven weeks to Jan. 10, though it has lagged closest rivals Asda and Morrison.

King said the group had made significant progress in improving its price perception with customers.

"That price perception improvement is the biggest single improvement in our customer measures we've seen in our last quarter," he told reporters on a conference call. ($1=.6822 Pound) (Editing by Rupert Winchester and Simon Jessop)

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