* H1 profit 123 million sterling vs forecast 121 million
* Cost cuts offset weak sales
* Sees stronger currency headwinds in H2
* H1 dividend kept at 4.7 pence a share
* Shares down 1.1 percent (Adds CEO, analyst comments, detail, background, shares)
By Mark Potter
LONDON, Oct 21 (Reuters) - Home Retail, Britain's biggest household goods retailer, struck a cautious tone about prospects for consumer demand as it posted flat first-half profits on Wednesday.
Shares in the firm behind catalogue-based Argos stores and the Homebase do-it-yourself chain fell as much as 3.4 percent as some analysts warned that competition from specialist retailers like DSG and supermarkets was heating up.
"The lack of any (profit) upgrades continues to suggest the company has little visibility heading into the important peak Q3 period, despite weaker comparatives," Credit Suisse analysts said, keeping an "underweight" rating on the stock.
British retail shares have been rallying amid signs the country is emerging from recession. A survey last week showed retail sales rising at their fastest annual pace for five months.
Shares in Home Retail, which is debt free, has a focus on low prices and has been cutting costs to offset weak demand, have outperformed by the DJ Stoxx European Retail Index by 27 percent this year.
"We continue to plan cautiously for consumer demand over the remainder of the financial year, Home Retail Chief Executive Terry Duddy said.
At 0921 GMT, Home Retail shares were down 1.1 percent at 304.6 pence, off an earlier low of 297.4 pence and valuing the business at about 2.7 billion pounds.
GO GO HAMSTERS
Home Retail, which sells one in every five televisions bought in Britain, said profit before tax, goodwill and one-off items rose 1 percent to 123 million pounds ($202 million) in the 26 weeks to Aug. 29. That was just above analysts' average forecast of 121 million pounds in a company poll.
Sales rose 3 percent to 2.8 billion pounds, as market share gains in televisions and toys at Argos offset a weaker video games market.
Duddy said extending Argos's "value" range to over 300 products, increasing the number of "WOW" deals to more than 300 and strong sales over the Internet also helped.
He tipped Go Go Hamsters, Lego and VTech children's cameras as top-sellers for Christmas.
Operating and distribution costs were cut by 32 million pounds, or 3 percent, in the first half.
But profit margins still fell, as the group suffered from the recent decline in sterling which ramped up costs on the $1.6 billion of goods it imports from overseas.
Duddy said currency headwinds would peak in the second half, but kept his full-year guidance for profit margins and was comfortable with analysts' consensus earnings forecast of around 255 million pounds. That would be down from the 328 million posted the year before.
The interim dividend was kept at 4.7 pence a share.
Home Retail said it was trialling a separate Argos Web site in Spain aimed at Britons living abroad, but Duddy said this was not a prelude to a broader expansion across Europe.
He denied the firm was being hit by refurbished stores at electricals rival DSG or by expansion into non-food ranges by supermarkets such as J Sainsbury.
But Seymour Pierce analysts remained concerned competition was increasing and kept a "sell" rating on the shares. (Editing by Rupert Winchester)