UPDATE 2-Debenhams sacrifices some profit to lure wary shoppers

* 5 weeks to Jan. 5 underlying sales up 5.0 pct * 18 weeks to Jan. 5 underlying sales up 2.9 pct * FY gross margin guidance reduced to up 10 basis points * CEO says Xmas market most competitive in 37-year career * Shares down 6.3 pct, having doubled in last 12 months (Adds detail, CEO, analyst comment, shares) By James Davey LONDON, Jan 8 (Reuters) - Debenhams sacrificed someof a planned improvement in profit margins to lure Christmasshoppers with cut-price deals, highlighting the pressure onBritain's retailers as they struggle with subdued consumerspending. An industry survey on Tuesday said underlying British retailsales rose just 0.3 percent year-on-year in December. That is well below the rate of inflation, suggesting stores sold less inreal terms, and increases the chances that the economycontracted in the last three months of 2012. Debenhams, Britain's second-biggest department store chainafter John Lewis, said it achieved record sales overthe holiday season, driven by strong growth in online trading. But the group said it had to step up promotions to winshoppers grappling with rising fuel prices, muted wages growthand uncertain job prospects. As a result, its gross profitmargin for the 2012-13 fiscal year was likely to rise 10 basispoints, rather than the previously assumed 20 basis points. "Strong sales, but at a cost," Espirito Santo analysts saidof the performance, adding the lower guidance on margins couldreduce full-year profit forecasts. Debenhams shares, which have doubled over the past year,were down 6.3 percent at 109.7 pence by 1145 GMT. "Christmas shopping came very late, not only did customershave less money to spend, they've now become acclimatised to thenew economic reality. They were extremely canny about how theyspent their money," Chief Executive Michael Sharp said,describing the trading environment as the most competitive hehad seen in his 37-year retail career. Debenhams' figures came a week after John Lewis postedbumper Christmas takings and clothing retailer Next raised profit guidance after a solid holiday season. Sharp said Debenhams' performance, when compared with thesurvey from the British Retail Consortium, showed the firm was"definitely winning and somebody else is losing big time." Britain's biggest clothing retailer Marks & Spencer is forecast to report a decline in general merchandise saleswhen it posts quarter figures on Thursday. ONLINE SALES Debenhams' sales at stores open over a year rose 5.0 percentin the five weeks to Jan. 5, with like-for-like sales in the 18weeks to Jan. 5 - a big chunk of the firm's fiscal first half -up 2.9 percent. That compared with analysts' average forecast for the firsthalf to end-February of an increase of 2 percent. As was the case with John Lewis, growth was boosted bystrong demand online, with sales over the 18 weeks up 39percent, ahead of the firm's expectations. Online sales now account for 12.6 percent of Debenhams'total sales, up from 9.3 percent this time last year. "Mobile was a huge story this Christmas, 36 percent of thetraffic to the website came via mobile devices," Sharp said. He dismissed comments from Next, which had said there werefewer promotions in the shops compared with Christmas 2011. "I think they (Next) need to get out a bit more," he said. "It's quite plain that the market was more promotional thanlast year. All our major competitors were doingnon-like-for-like promotional activity." Debenhams said it was on promotion for two more days in the18-week period than in the previous year, including one-dayspecials offering discounts of up to 50 percent. "Debenhams is suffering from the extremely promotionalbackdrop we saw pre-Christmas and are continuing to see," saidPanmure Gordon analyst Jean Roche. Sharp was confident Debenhams' like-for-like sales momentumwould continue through the balance of the fiscal year, helped byits breadth of products, appeal to a wide range of customers andwell-received marketing campaigns. For a FACTBOX-How UK retailers fared over Christmas, pleaseclick on: ($1 = 0.6218 British pounds) (Reporting by James Davey; Editing by Kate Holton and MarkPotter)