Morrisons is still having problems with Safeway

Morrisons said problems uncovered at the Safeway chain - the business it bought last year - would knock �40m ($77m) off its annual earnings.

The retailer now expects to report pre-tax profits before exceptional items of between �320m and �330m, against forecasts of about �364m.

The Bradford-based business will unveil its results on Wednesday next week.

Morrisons shares fell by more than 5% in early trade, but in afternoon trade they recovered from lows to close down 5.5 pence, or 3%, at 206.5p.

Accounting problems

It is the second time in the space of a year that Morrisons has warned on profits.

Morrisons - which is now the UK's fourth largest supermarket group - has struggled to merge the Safeway business into its own since it bought Safeway for �3bn in March last year.

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The group said last year it was accelerating the conversion of Safeway stores into Morrisons outlets. Sales at Safeway-branded stores have been poor, although the rebranded shops have performed well.

Morrisons said the �40m charge followed a "review of Safeway supplier balances and follows issues encountered with the Safeway accounting systems during 2004".

In October last year, Morrisons had criticised the previous directors at Safeway for introducing a new accounting system four weeks prior to the takeover.

Tony Shiret, retail analyst at CSFB, said: "During a period when firms are trying to integrate there are going to be periods when things don't go well.

"The fact that there is an issue with the integration is no great surprise - but the timing of the announcement is unfortunate."