* H1 underlying profit 288 mln stg vs forecast 285-290 mln
* Says continuing to plan for challenging trading conditions
* Says competitive environment offset by capacity withdrawal
* Shares up 1.8 percent
(Adds CEO, analyst comments, shares, UK retail data, graphic)
By Mark Potter
LONDON, Sept 17 (Reuters) - Kingfisher, Europe's biggest home improvements retailer, posted a 35 percent rise in first-half profit, joining a growing list of store groups to defy analysts' fears while also warning of a slow recovery.
Kingfisher, which runs market leaders B&Q in Britain and Castorama in France, said on Thursday it had benefitted from cost cuts, store revamps and supply chain improvements, though warm weather had also helped boost sales.
Chief Executive Ian Cheshire said Kingfisher had also made the most of changing priorities among consumers who are spending more time at home in the recession and, with little prospect of moving house, focussing on making it more pleasant to live in.
"We're seeing slightly more adventurous customers," Cheshire told reporters. "Instead of everything being magnolia because you've got to flog it (your house) or do a buy to let, we're seeing designer wallpaper and accent colours."
Europe's retailers have mostly had a tough time in the economic downturn, and while there are signs the recession is over in some countries, there are fears that consumers will hold back from discretionary spending to rebuild savings.
British retail sales were flat on the month in August against expectations for a small rise, with clothing sales exerting the biggest downward impact, official data showed on Thursday.
For a graphic comparing UK retail sales with the relative performance of UK retail stocks, click here: http://graphics.thomsonreuters.com/099/UK_RTLEQ0909.gif
Kingfisher, with 824 stores across eight countries, said it remained cautious about the prospects for consumer spending amid rising unemployment and the possibility of higher taxes, echoing concerns aired by a procession of retailers.
John Lewis, Britain's biggest department store chain, forecast a "slow, drawn out economic recovery" on Thursday, while fashion chain Next said on Wednesday trading was likely to remain tough, even as it beat first-half profit forecasts.
Kingfisher, the world's third-biggest home improvements retailer behind U.S. groups Lowe's and Home Depot, said it made a profit before tax and one-off items of 288 million pounds ($474 million) in the six months to Aug. 1.
Sales were up 7 percent to 5.5 billion pounds.
The stock, which has outperformed the DJ Stoxx European retail index by 32 percent, was up 1.8 percent at 209.1 pence by 0805 GMT, valuing the firm at about 4.9 billion pounds.
The British group said last week, after inadvertently releasing some figures to analysts, that first-half profits would be between 285 million and 290 million pounds, ahead of analysts' consensus forecast at that time of 268 million.
SELF-HELP
Singer analyst Matthew McEachran was impressed by Kingfisher's self-help initiatives.
"Many of the factors behind this strong performance are continuing in nature and not necessarily one-off or driven by the seasonal trading conditions," he said, keeping a "buy" rating on Kingfisher's shares. Cheshire said there were signs of a step up in competition in Britain, but this was being offset by the withdrawal of capacity from the home improvements market following the demise or downsizing of groups like MFI and Floors 2 Go.
Homebase, Britain's second-biggest do-it-yourself chain, reported a 400 basis point drop in quarterly gross profit margins last week, raising fears of a price war.
B&Q's gross profit margin rose 100 basis points in the first half and Cheshire was confident of further improvement in the second half, although probably not at the same level.
Kingfisher also said it was rolling out a more limited revamp of its stores focused on kitchens, bathrooms and bedrooms, positioning itself to benefit from the demise of competitors in these categories.
The firm also said that plans to turn around its loss-making Chinese business remained on track, with 15 of a planned 22 stores now closed and two of a planned 17 downsized.
Kingfisher kept its interim dividend at 1.925 pence a share. ($1=.6079 pounds) (Editing by Lin Noueihed)