By Himanshi Akhand and Byron Kaye

(Reuters) -Top Australian supermarket chain Woolworths said annual profit slumped as it cut prices to overcome a consumer backlash and reported sluggish sales growth in the start of the new financial year, sending its shares sharply lower.

The company, which alongside smaller rival Coles makes two-thirds of Australian grocery sales, said profit tumbled 19% in the year to end-June, in line with analyst forecasts. It also revealed weaker-than-expected sales growth in the eight weeks since then.

"Our results are below our expectations," CEO Amanda Bardwell said on a call with journalists. "Our current sales growth remains below our aspirations."

The result shows the financial fallout of a reputational rough patch for Woolworths, which has faced criticism over shelf prices amid high inflation since 2022.

The Australian Competition and Consumer Commission accused Woolworths and Coles in lawsuits - which the retailers are defending - of misleading shoppers by jacking up prices then advertising discounts higher than the original price.

Woolworths has cut prices and says it wants to "restore price perception". Its earnings to sales margin for Australian food shrank to 5.4% in the 2025 financial year, from 6.2% the previous year.

But Australian food sales were still slower than analyst forecasts. Sales at the company's main unit grew 2.1% in the first eight weeks of the fiscal year, compared to Visible Alpha consensus forecast of 4.1% for the first six months.

The sales growth also lagged Coles, which reported a nearly 5% growth a day earlier for the period.

The grocer's shares fell as much as 16% and were down 13% by midsession, headed for their worst day on record, against a slightly higher overall market.

The "question now will be if something more fundamental needs to be done to get shoppers back into store as it does not appear, on face value, that WOW's loyalty, price and network investment is yielding the results it should," said Jarden analysts in a client note.

RBC Capital Markets analyst Michael Toner said the company's headline results met expectations, however the "large ... drop in AU Food return on funds employed in a single year for investors is concerning".

Woolworths said it expected Australian food to return to mid- to high-single-digit operating earnings growth in the current financial year, but warned that near-term headwinds from declining tobacco sales could dent the earnings by up to A$100 million.

Earnings from Australian Food segment declined 12.9%, driven by thinner margins, wage increases, and impact from a strike at its distribution centres in the first half.

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That drove underlying profit down 19% to A$1.39 billion ($883.73 million) for the year, in line with a Visible Alpha consensus estimate of A$1.38 billion.

The company, which sells more than one-third of Australian groceries, declared a final dividend of 45 Australian cents per share, lower than 57 cents apiece declared last year.

($1 = 1.5389 Australian dollars)

(Reporting by Byron Kaye in Sydney and Himanshi Akhand and Rajasik Mukherjee in Bengaluru; Editing by Sherry Jacob-Phillips and Stephen Coates)

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