* To close 22, downsize 17 Chinese stores
* Underlying profit 368 million sterling vs 364 million forecast
* CEO comfortable with 2009/10 forecasts for a profit fall * To cut capex, working capital, reduce UK costs
* Shares fall as much as 5.7 percent
(Adds more company comment, updates shares)
By Mark Potter
LONDON, March 26 (Reuters) - Kingfisher, Europe's top home improvements retailer, plans to close a third of its loss-making Chinese stores and said it expected group profit to fall this year as the global recession takes hold.
Shares in the firm, which runs market leaders B&Q in Britain and Castorama in France, fell as much as 5.7 percent to 134.2 pence on Thursday, unwinding some recent outperformance against rivals on high hopes for its turnaround strategy.
The world's third-biggest home improvements group, which met forecasts with a 3.1 percent rise in annual profit, said it would take further steps to mitigate tough trading by reducing investment, working capital and costs.
"We're assuming difficult markets and focusing on the self help," Chief Executive Ian Cheshire told reporters.
"I would hope things are trading better by the end of the year, but we're not going to assume any quick uplift."
Some analysts said Kingfisher's shares, which have beaten the DJ Stoxx European retail index by almost 30 percent over the past year, did not reflect the challenges.
"Profits are set to decline...and the group is vulnerable to operational gearing in parts of its operations and high margins in others. We believe that the shares do not fully reflect these risks after recent strength," Credit Suisse analysts said.
At 1415 GMT, Kingfisher stock was down 3.7 percent at 137.1 pence, valuing the firm at 3.3 billion pounds ($4.8 billion).
FIXING CHINA
Kingfisher runs over 800 stores in eight countries and has been hit hard by a downturn in most of its major markets.
UK retail sales plunged 1.9 percent month-on-month in February, official figures showed, while data from France showed consumers mired in gloom.
Kingfisher said it made profit before tax and one-off items of 368 million pounds in the year ended January, close to analysts' average forecast of 364 million in a company poll.
Sales from continuing operations rose 10.8 percent to 10.03 billion pounds, but were down 4.1 percent on a same-store basis.
B&Q China made a loss of 52 million pounds, battered by a property slump, and Kingfisher said it would respond by shutting 22 and downsizing 17 of its 63 stores there.
It will revamp the rest as part of a plan that will cost about 30 million pounds in cash, but which should be offset by selling the two freehold stores among the 22 being shut.
There will also be a non-cash one-off impairment charge of 160 million pounds, 124 million of which relates to writing off goodwill at the Chinese business.
Cheshire said he had looked into exiting China, but said the market still offered great long-term growth potential if the group corrected mistakes, such as over-rapid expansion, over-reliance on suppliers and too many products.
He was comfortable with analysts forecasts for the unit to cut losses to 30-40 million pounds in 2009-10 and said he was aiming for it to return to profit by the end of 2010.
He did not expect job losses from the closures because the stores employ many staff from suppliers, which are expected to be redeployed. Kingfisher will actually hire a net 600 staff as it takes a stronger control of remaining stores, he said.
Cheshire said he was in contact with major international retailers including Wal-Mart, Carrefour, Tesco, Best Buy and Decathlon over renting out space in the stores to be downsized.
"There's quite a lot of interest in the big-box (store format in China)," he told a news conference, noting Germany's Metro announced plans earlier this week to expand its MediaMarkt electrical goods business into China.
Cheshire said he was comfortable with analysts' consensus forecast for adjusted profit in 2009-10 of 323 million pounds, but the firm was focusing on trying to limit any profit fall.
Kingfisher said it would cut capital spending to 300 million pounds in 2009-10 from 390 million in 2008-9. It will also aim to reduce working capital by a further 50 million pounds and reduce costs in the UK by 1 percent year-on-year. ($1=.6871 Pound) (Editing by Mike Nesbit and Erica Billingham)