* Underlying profit A$1.6 bln vs A$1.68 bln analyst expectations
* "Bag rage" hits sales over first 7 weeks of this financial yr
* Shares hit two-month low early, recover most losses
* Same-store sales slowing while rival Coles' gain (Adds quote from shopper)
By Tom Westbrook
SYDNEY, Aug 20 (Reuters) - Australia's biggest grocer Woolworths Group flagged on Monday it had rapidly lost sales momentum after starting to charge shoppers for plastic bags, sending its shares lower.
The slowdown, combined with signs of a revival at major rival Coles, where bags are still free, signals a possible end to years of outsized growth at Woolworths, which has dropped prices heavily to win business.
It also shows the financial cost of the backlash by Australia's customers against the move, with shoppers cutting purchases they couldn't carry home. Despite the so-called "bag rage", Woolworths has stood by the levy, betting opposition to it will be short-lived.
A Reuters straw poll of shoppers outside a Woolworths Sydney city store found most supportive of the move, but it was an issue for a few.
"I know Coles are trying to keep their sales up and so if I didn't have a bag, I would go to Coles instead, especially if you're buying meat or something," shopper Anthony Woolcock said on his way out of the store.
Woolworths shares fell 3.5 percent at start of trading on Monday to a two-month low before erasing most of the losses to close down 0.6 percent, while the broader market rose 0.1 percent.
"Although it is a temporary impact it's a slight negative - it's changing consumer behaviour," said Jason Teh, Chief Investment Officer at fund manager Vertium Asset Management, which owns Woolworths shares.
Similar moves to curtail bag use, aimed at reducing waste and protecting the environment, have mostly proceeded without a hitch in some 60 countries, from France to Korea.
But after Woolworths removed one-use bags on June 20, checkout staff reported abuse and angry customers vented online, with the outrage prompting the company to put off plans to charge A$0.15 ($0.11) for reusable bags until July 8.
Woolworths said on Monday the shift contributed to comparable sales growth slumping over the first seven weeks of the 2019 financial year to 1.3 percent from 3.1 percent in the prior quarter. Comparable sales exclude new store openings.
"In the early stages of the adjustment we did see our customers have slightly less items in their basket," Woolworths' Chief Executive Officer Brad Banducci said on a conference call, adding it also led to packing problems.
"Both of those issues we see falling away, quite frankly, at the moment ... we see customers remembering to bring their bags," he said.
Stuart Palmer, who heads ethics research at Australian Ethical, a pension fund that avoids investing in sectors such as coal, oil, tobacco and gambling, said the move did not amount to a trade off between profits and principles.
"People are seeing a company which is living its values around fresh food, which requires good environmental conditions in which to catch fish and grow food," Palmer said, adding that sales lost due to the levy will probably bounce back.
"I think that longer-term alignment between what they've done and their brand and their future profitability is pretty strong."
Coles, which has ended one-use bags but continues to hand out reusable bags for free, last week reported no effect of the change on its sales, which are gaining just as Woolworths' have faltered.
Woolworths said comparable sales growth for the second half of the financial year that ended on June 30 slipped by a quarter to 3.7 percent, even as the company more than tripled the amount of permanently discounted stock over the year.
That kept underlying net profit for the year, while 12.9 percent higher at A$1.6 billion, behind market expectations for A$1.68 billion. Underlying net profit excludes one-offs. Total revenue for the year was A$57.1 billion. ($1 = 1.3669 Australian dollars) (Reporting by Tom Westbrook in Sydney; additional reporting by Rushil Dutta in Bengaluru; Editing by Peter Cooney and Muralikumar Anantharaman)