* Q1 sales A$15.7 bln vs A$16.2 bln
* Says H1 net profit to fall up to 35 pct
* Company is restructuring to fend off competition (Recasts, adds shares, CEO and analyst comments, additional earnings)
By Byron Kaye
SYDNEY, Oct 29 (Reuters) - Woolworths Ltd, Australia's No. 1 grocery chain, reported weaker first-quarter sales and warned its half-year profit will slump by a third, knocking its shares sharply lower as investors grow impatient with its turnaround plan.
The retailer, whose CEO and chairman both resigned earlier this year as it reported its first annual profit decline in two decades, said on Thursday that total first-quarter sales fell 2.5 percent to A$15.7 billion ($11.1 billion) for the 14 weeks to Oct. 4.
It forecast a first-half net profit of A$900 million to A$1 billion, down 28 percent to 35 percent on the previous year's interim result, "as a consequence of our increased investments".
Woolworths shares tumbled 9 percent in a flat overall market to be down 17 percent so far this year, against a 1.4 percent decline in the broader market.
"There's a tendency for the market to look at the short-term and extrapolate, but we don't see this as a permanent position for Woolworths," said Morningstar analyst Gareth James.
"It's taking some tough decisions at the moment but it's the right medicine."
Woolworths is shedding thousands of staff and cutting margins in a bid to keep a dominant share of the market and fend off intense competition from rival Coles, owned by Wesfarmers Ltd, and cut-price newcomers like Germany's Aldi .
Meanwhile, it is continuing a global search to replace CEO Grant O'Brien, who quit in June but said he will stay until the company finds a successor.
It also faces ongoing speculation about a potential sale of its stake in Masters, a hardware joint venture with U.S.-based Lowe's Companies Inc, and of its budget general merchandise chain, Big W.
On Thursday, Woolworths said total home improvement sales grew 20.3 percent in the quarter due to new store openings, while Big W sales fell 7.9 percent.
Petrol sales dropped 27.9 percent because of lower fuel prices and because it no longer reports sales from service stations run by its fuel partner Caltex Australia Ltd.
Food and liquor sales, which generate 70 percent of the company's revenue, grew just 0.4 percent because of lower shelf prices. By comparison, Coles reported a 4.7 percent rise in first-quarter food and liquor sales a week earlier.
($1 = 1.4096 Australian dollars) (Reporting by Byron Kaye; Editing by Richard Pullin)