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LONDON (Reuters) - Britain's Sainsbury's (SBRY.L) beat forecasts for Christmas trading in its core supermarket business and was upbeat on prospects for its newly acquired Argos general merchandise division after that also surpassed expectations.
Sainsbury's, Britain's second biggest supermarket chain, joins fourth-ranked Morrisons (MRW.L) in reporting better-than-expected Christmas trading and its shares gained as much as 7 percent on Wednesday.
Industry data has indicated that market leader Tesco (TSCO.L), which gives an update on Thursday, has also fared well, showing shoppers were prepared to splash out on food over the holiday season.
A strong Christmas will come as a relief to the big four players in the industry following several years of turmoil sparked by the rise of German discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL].
Those two challengers have also reported robust festive numbers as the overall market grew and reaffirmed their commitment to ultra-low prices.
Some analysts said the going could get tougher for Sainsbury's as price pressures rise in Britain.
"We remain of the view that challenges will be on the increase for both sides of the group, given a combination of sourcing pressures and a more challenged consumer," said analysts at Jefferies, who have a "hold" stance on the stock.
Sainsbury's CEO Mike Coupe said the grocery market remained intensely competitive with the impact of the devaluation of sterling since last June's Brexit vote still uncertain.
Analysts have also expressed concern about a potential squeeze on consumer spending this year as inflation begins to erode real earnings growth.
Coupe said Sainsbury's was well placed to navigate external pressures because it has invested in areas of the business that are still showing strong growth, namely convenience and online, fresh food, clothing and general merchandise.
"We have reasons to believe...We have confidence in our strategy," he told reporters.
Sainsbury's shares have increased 8.5 percent over the last year, well below rises of 35 percent and 50 percent for Tesco and Morrisons respectively.
However, while Tesco and Morrisons are both in turnaround mode after going through disastrous periods, Sainsbury's market share has remained broadly stable over the last five years.
Sainsbury's stock is relatively cheap compared to rivals. It has a forward price earnings ratio of around 12.8 times, compared to around 21 for Tesco and Morrisons, the biggest discount in at least a decade.
Enhancing its online logistics and general merchandise range, Sainsbury's last year bought Argos-owner Home Retail for 1.1 billion pounds ($1.3 billion).
Some investors fear the Argos takeover unwisely increases Sainsbury's exposure to higher import costs given sterling's depreciation. However, Coupe said Argos's Christmas trading had vindicated the deal.
"If anything the performance over Christmas has reinforced, if not added, to our confidence in our ability to execute, he said.
Argos' like-for-like sales increased 4.0 percent, well ahead of analysts' consensus of 1.5 percent.
Sainsbury's said sales at its grocery stores open over a year rose 0.1 percent, excluding fuel, in the 15 weeks to Jan. 7, the third quarter of the company's financial year.
Although only a modest increase, that was ahead of analysts' average forecast of a fall of 0.8 percent and a second quarter decline of 1.1 percent.
It was also Sainsbury's first positive like-for-like sales performance since the fourth quarter of its 2015-16 year.
Sainsbury's highlighted strong sales growth from its online groceries and convenience operations over the quarter, up over 9 and 6 percent, while sales of clothing and general merchandise were also up 10 percent and 3 percent.
Sainsbury's plans to introduce around 250 Argos outlets into its supermarkets over three years. It currently has 30, including 10 that have been operating for over a year.
Interim finance chief Ed Barker said he was comfortable with analysts average pretax profit forecast for 2016-17 of 573 million pounds, which would be a third straight year of decline.
($1 = 0.8253 pounds)
Additional reporting by Vikram Subhedar; Editing by Keith Weir