UPDATE 3-Britain's Sainsbury's raises profit outlook after stellar Christmas

* Q3 underlying sales up 8.6%

* Raises 2020-21 profit forecast to at least 330 mln stg

* COVID-19 restrictions changed Christmas shopping behaviour

* Shares up 3.7% (Adds detail, CEO comments, updates shares)

LONDON, Jan 7 (Reuters) - British supermarket group Sainsbury’s raised its profit outlook after beating its own expectations for trading in the Christmas quarter as COVID-19 restrictions meant people celebrated more at home.

Sainsbury’s, Britain’s largest grocer after Tesco, said on Thursday like-for-like sales, excluding fuel, rose 8.6% over the 15 weeks to Jan. 2, its fiscal third quarter.

Food, general merchandise and clothing sales were all stronger than it had expected, the group said, driven by England’s second national lockdown in November, subsequent increased restrictions throughout the United Kingdom and improved online operations.

Sainsbury’s shares were up 3.7% at 1021 GMT, taking year-on-year gains to 10%.

The restrictions made many customers change their Christmas plans at the last minute, which led to different shopping behaviour.

“Given all of the challenges that everyone’s felt, customers wanted to treat themselves,” CEO Simon Roberts told reporters.

Smaller gatherings meant Sainsbury’s sold smaller turkeys and more lamb and beef than normal, Roberts said.

While grocery sales grew 7.4%, Sainsbury’s premium ‘Taste the Difference’ brand saw an 11% increase and sales of premium champagne soared 52%.

General merchandise sales grew 6%, sales in the Argos division rose 8.4% and clothing by 0.4%.

Online grocery sales jumped 128% and overall digital sales grew 81%, representing 44% of total sales.

After forgoing business rates relief of 410 million pounds ($557 million), Sainsbury’s forecast underlying pretax profit of at least 330 million pounds for its 2020-21 year.

That is above a forecast made last month of at least 270 million pounds, though down from the 586 million made in 2019-2020, due to the costs of the pandemic.

As the spread of the coronavirus intensifies, Roberts said rising staff absence rates had reached 8%.

Restrictions to contain the virus mean many people are working from home and the hospitality sector is closed.

Adding to the demand for supermarket goods, many of the five million or so Britons who normally travel abroad for Christmas stayed at home.

Industry data published on Tuesday, showed all of Britain’s supermarket groups benefited from unprecedented Christmas demand as the country’s shoppers spent 11.7 billion pounds on groceries in December.

Morrisons and Aldi, Britain’s fourth and fifth largest supermarket groups, reported strong Christmas trading earlier this week, as did B&M on Thursday.

$1 = 0.7361 pounds Reporting by James Davey; Editing by Kate Holton and Barbara Lewis