New stores, cost cutting and demand for online and convenience shopping helped grocer J Sainsbury meet first-half profit forecasts in a tough trading environment the group said was set to continue.

Chief Executive Justin King said on Wednesday shoppers were under tremendous pressure as disposable incomes were squeezed by higher prices, muted wages growth and austerity measures, and as they worried about an uncertain economic outlook.

But he was optimistic of a good Christmas, the busiest trading period of the year for retailers.

What we see is customers, week in week out, managing their household budgets very tightly ... They're doing that at least in part so they can have some money, not so much to splash out, but to enjoy special occasions, he told reporters.

Sainsbury's, Britain's third-biggest supermarket group behind Wal-Mart's Asda and Tesco, also described the grocery industry as incredibly competitive.

Tesco launched a price cutting campaign in September and some analysts think Sainsbury's, with net debt of over 2 billion pounds, has less financial firepower to respond than other major competitors.

Sainsbury's underlying operating profit margin rose just 10 basis points at constant fuel prices in the first half, and Finance Director John Rogers said the full-year increase would be at the bottom of its 10-20 basis point guidance range.

He did not expect analysts' consensus full-year profit forecast of 702 million pounds to change, however, as the group was keeping a tight rein on advertising spending and costs.

DOWNSIDE RISKS

Many retailers are having a tough time as shoppers curb spending. Kesa Electricals on Wednesday agreed to sell loss-making chain Comet for just two pounds, becoming the second electronics retailer in a week to pull out of the cut-throat market.

Grocers traditionally fare better in tough economic times thanks to their focus on essential goods. But they have also seen sales growth slow markedly this year, and analysts fear plans to open new stores from all the major players as well as the price cutting drive from Tesco could hit industry profits.

Sainsbury remains very vulnerable in this environment. It is paying dividend out of debt, has the weakest cash flow and the thinnest margin of the Big 4 (British grocers), said Evolution Securities analyst Dave McCarthy.

Sainsbury's said profit before tax and one-off items rose 6.6 percent to 354 million pounds in the 28 weeks to October 1, just above the average forecast of 352 million pounds in a Reuters poll of 17 analysts.

A robust performance in tough industry conditions, Credit Suisse analysts said, although they added risks to future profit forecasts were on the downside.

At 9:30 a.m., Sainsbury's shares were down 0.4 percent at 299.2 pence. That was ahead of a 0.8 percent fall on the STOXX Europe 600 retail index, although the stock has lagged that index by 13 percent so far this year.

Sainsbury's has outstripped sales growth at its main rivals for most of the past few years as it opens more stores outside its south England heartlands, expands into convenience and online shopping and introduces more non-food ranges.

Data on Tuesday, though, showed Sainsbury's growing sales in line with Tesco and lagging Asda and Wm Morrison, which reports third-quarter sales on Thursday.

Figures on Wednesday also showed the impact of the grocery price battle, with food price inflation falling to 4.2 percent in October from 5.0 percent in September.

Sainsbury's said it offset higher costs in its first half with 50 million pounds of savings, that its new stores were achieving their target for return on investment and the value of its properties had risen 400 million pounds to 10.9 billion.

It also reported a 301-million-pound increase in net debt to 2.1 billion pounds, partly due to its investment in new stores, but also due to higher stock levels, which some analysts saw as a concern in a tough trading environment.

The interim dividend rose 4.7 percent to 4.5 pence a share.

(Editing by Helen Massy-Beresford)