Sainsbury's lags rivals as Christmas sales dip

LONDON (Reuters) - Sainsbury's reported a worse-than-expected fall in Christmas sales on Wednesday, confirming that Britain's second-largest supermarket group has fallen behind competitors as it battles to acquire smaller rival Asda.

The group said that while grocery sales were solid in its third quarter it suffered from poor demand for general merchandise.

Sainsbury's like-for-like sales, excluding fuel, fell 1.1 percent in the 15 weeks to Jan. 5 - below analysts' average forecast of a 0.2 percent fall. Second quarter sales had risen 1.0 percent.

"Retail markets are highly competitive and very promotional and the consumer outlook continues to be uncertain," said Chief Executive Mike Coupe.

The group said its total retail sales fell 0.4 percent in the quarter. That reflected a 0.4 percent rise in grocery sales which was more than offset by a 2.3 percent fall in general merchandise sales.

It blamed the shortfall in general merchandise, which includes its Argos business, on cautious customer spending and its decision to reduce promotional activity across Black Friday in November.

If market leader Tesco meets analysts' consensus forecast when it reports third quarter and Christmas trading on Thursday, Sainsbury's will be the weakest underlying performance of the big listed UK food retailers in the key festive period.

On Tuesday, No. 4 Morrisons reported a 0.6 percent rise in retail like-for-like sales for the nine weeks to Jan. 6 while industry data showed discounters Aldi [ALDIEI.UL] and Lidl won market share from all of the big four chains in the Christmas quarter.

Morrisons said shoppers had become more cautious amid uncertainty over Brexit.

Sainsbury's 7.3 billion pound deal to buy No. 3 player Asda, the UK arm of Walmart, could see the combined group leapfrog Tesco as Britain's biggest retailer.

It is currently being probed by the regulator - the Competition and Markets Authority (CMA), which has said it will publish provisional findings this month or early next month.

Shares in Sainsbury's are up 11 percent year-on-year but have fallen 15 percent over the last three months on concerns the Asda deal may not proceed.

The stock closed on Tuesday at 266.5 pence, valuing the business at 5.87 billion pounds ($7.48 billion).

Prior to Wednesday's update, analysts were on average forecasting a pretax profit for Sainsbury's 2018-19 year of 634 million pounds, up from 589 million in 2017-18.

($1 = 0.7848 pounds)

(Reporting by James Davey; Editing by Kate Holton and Mark Potter)

By James Davey