Adds CEO quotes in paragraphs 6, 7, 8, share price in paragraph 4, context on consumer sentiment and Western Europe throughout

By Alicja Surdy

July 9 (Reuters) - European discount retailer Pepco Group PCOP.WA raised its full-year guidance on Thursday after reporting stronger underlying trading in the third quarter, driven by a strong performance in Western Europe.

Pepco's third-quarter like-for-like sales rose 5.4%, excluding fast-moving consumer goods following the disposal of its Dealz business in Poland. Shoppers across Pepco's markets remain selective.

The retailer now expects a gross margin of around 51% and mid-teens underlying EBITDA growth for the full year 2026.

Shares in Pepco gained as much as 5% on the news.

The update is the first since Pepco agreed in June to sell its Dealz Poland business to Modella Capital for a nominal price, completing its exit from fast-moving consumer goods and a strategic reset that saw it sell the struggling Poundland chain in 2025.

"We are happy that we finally have a liberated Pepco," CEO Stephan Borchert told Reuters, adding the move marked the end of a restructuring phase and the start of accelerated growth focused solely on the Pepco format.

Borchert said the sale of Dealz was "not a hero deal," but a crucial step to remove a business that had been a material drain on management time and cash.

"Consumer sentiment is very subdued, still everywhere in Europe," Borchert said. He added that while consumers have disposable income, they "really look for value" and may be trading down from the middle class.

The third quarter's like-for-like growth was driven by a 15% jump in Western Europe, where the company sees a major opportunity due to a less competitive and more fragmented retail landscape than in its core Central and Eastern European markets.

Pepco said in May it would accelerate its expansion in Western Europe, aiming to double its presence there by 2030.

($1 = 0.8750 euros)