March 9, 2017 / 8:15 AM / 4 months ago

UPDATE 2-UK's Morrisons caution on import costs overshadows profit rise

4 Min Read

* Says uncertainty around imported food prices

* Also flags higher depreciation, pension, staff costs

* Underlying full-year profit rises for first time in five years (Adds CEO, analyst comment, shares)

By James Davey

LONDON, March 9 (Reuters) - Morrisons, Britain's fourth biggest supermarket chain, warned more expensive food imports were creating uncertainties after a new management team delivered a first rise in annual profit in five years.

Shares in Morrisons, which trails market leader Tesco , Sainsbury's and Asda in annual sales, fell as much as 6 percent after the group also flagged an increase of up to 50 million pounds ($61 million) in depreciation and pension costs in 2017-18. It also faces higher staff costs.

"There are some uncertainties ahead, especially around the impact on imported food prices if sterling stays at lower levels," the company said on Thursday.

Morrisons said all the increased costs were incorporated into its plan and it was confident its turnaround was on track.

However, the stock was down 12.7 pence at 234 pence at 1110 GMT, the cautious comments taking some of the shine off an improved performance under Chief Executive David Potts.

Former Tesco executive Potts joined Morrisons in 2015 with the job of reviving the group after it was damaged by the rise of discounters Aldi and Lidl in its northern England heartland.

Potts has delivered a steady improvement in trading, helped by more competitive prices, improved product ranges and availability and better customer service, resulting in a 22 percent rise in the firm's shares over the last year.

Rising Prices

All of Britain's supermarket chains are having to deal with higher import costs as the pound has fallen about 11.5 percent against the euro and 19 percent against the U.S. dollar since June's Brexit vote.

The intensely competitive nature of Britain's food market means it is hard for grocers to pass on those increased costs to consumers. However, industry data published on Tuesday showed food inflation has doubled in a month.

Potts has also shed peripheral businesses and overhauled Morrisons' online strategy through a renegotiated agreement with distributor Ocado and a wholesale supply deal with Amazon.

"Overall the results are solid...but we don't see any material new positive surprises," said Bernstein analyst Bruno Monteyne.

Morrisons has recently been setting the pace in terms of UK industry sales. Sales at stores open over a year rose 2.5 percent year-on-year in its fourth quarter, while monthly industry data has indicated a positive start to 2017-18.

Some analysts believe Morrisons is vulnerable to a stronger Tesco and a fightback from Asda in 2017.

However, Potts was relaxed. "In the very end a stronger competitor makes for a stronger Morrisons because we learn from competitors but obsess about our customers," he told reporters.

Morrisons reported an 11.6 percent rise in underlying pretax profit to 337 million pounds for the year to Jan. 29, ahead of analysts' average forecasts, on turnover up 1.2 percent to 16.3 billion pounds.

Net debt was cut to 1.19 billion pounds and forecast to fall below 1 billion pounds by the end of 2017-18. Cost savings beyond the 1 billion pounds already achieved were also forecast. ($1 = 0.8226 pounds) (Editing by Keith Weir)

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