April 26, 2018 / 8:04 AM / a year ago

UPDATE 2-Australia Wesfarmers' Coles spin off in focus after tepid supermarket sales growth

* Overall retail sales rise 2.8 percent vs prior period

* Coles same-store growth modest at 0.9 pct

* British hardware sales tumble

* Shares drop as much as 1.6 pct before ending 0.6 pct up (Recasts on supermarket sales, adds analyst and management quotes; updates shares)

By Tom Westbrook

SYDNEY, April 26 (Reuters) - Australian retail conglomerate Wesfarmers posted a lackluster rise in quarterly sales at its Coles supermarkets division on Thursday, which analysts said justified its plan to exit the business.

The Perth-based company is preparing to spin off and separately list its Coles supermarkets as a price war with its larger rival Woolworths Group and discounters ALDI Inc and Costco Wholesale Corp has wrung profits from the industry.

Thursday's sales figures, which show Coles' same-store sales growth at 0.9 percent and tracking behind Woolworths', vindicate Wesfarmers' move to seek growth elsewhere and highlight the sector's drawbacks for would-be investors.

"(Coles) will go back to what it was, which is a separately listed company with slow growth and constant margin pressures," said David Walker, senior equities analyst at Clime Asset Management.

"This is a mature sector with constant jockeying for position, constant need for capital expenditure to refurbish stores, I think Wesfarmers is right to demerge this," he said.

Coles, for now still Wesfarmers' largest division and Australia's second-largest supermarket chain, posted liquor and food sales of A$7.8 billion ($5.9 billion) for the three months to March 31, Wesfarmers said on Thursday.

That was 1.9 percent higher than the same period a year ago.

Combined with strong sales at its domestic hardware business, Bunnings, and a rejuvenated discount department store Kmart, it helped lift overall retail sales 2.8 percent higher to A$14.9 billion.

No analyst forecasts were available for the quarterly result, but traders felt it fell short and sent the share price as much as 1.6 percent lower in early trade, before it reversed course and ended up 0.6 percent. The broader market fell 0.2 percent.

"The overall sales picture was not as positive as the market was looking for," said Michael McCarthy, chief market strategist at brokerage CMC Markets.

Same-store sales for Wesfarmers' laggard British hardware unit tumbled 15.4 percent, as unseasonal snowstorms crimped gardening tool purchases.

The unit is under review, pending either a turnaround plan or a sale, after Wesfarmers booked a $1 billion writedown on it in February.

Managing Director Rob Scott said a decision would be taken before a strategy day in June and added that recent media speculation of a imminent Wesfarmers acquisition was "incorrect".

"It would be quite possible that we'll be sitting here this time next year and I'll be explaining to you why we haven't done anything," he told journalists on a conference call.

"I think that's just as likely as sitting here in a year's time talking about what we may have done from an M&A point of view." ($1 = 1.3205 Australian dollars) (Reporting Tom Westbrook in Sydney and Devika Syamnath in Bengaluru; Editing by Stephen Coates and Muralikumar Anantharaman)

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