Recoveries of this nature take around three years

Bill Grimsey, Iceland chief executive

Chief executive Bill Grimsey said recovery would be a "major task" for the group.

Pre-tax profit before exceptional items and goodwill came to �40.1m, in line with the company's estimate at its third profit warning in March.

However, exceptional costs unexpectedly rose to �144.6m, an increase of �78.6m over Iceland's own estimate in March, due to a revaluation of the company's pension scheme. No final dividend will be paid.

Organic food

The company ran into trouble last year when a gamble on organic frozen food backfired.

Customers, who were used to promotional deals and lower prices shopped elsewhere.

Iceland's share price halved and a new management team was brought in to sort out the mess.

Its shares lost a further 5% to stand at 168p following the release of its results.

In the 13 weeks to June 30, like-for-like sales at Iceland were down 3.1% although in the last six weeks they were down only 1.3%.

Sales at Iceland's distribution business Booker meanwhile, had improved, with growth of 3.8% over the 13 week period.

In a strategy update, Iceland said its aim was to grow group sales by 15% by 2004/5, raising operating margins above 2.5%.

Uphill task

Mr Grimsey, who joined Iceland in December from DIY group Wickes, following the resignation of founder Malcolm Walker, said it faced an uphill task.

"The period since the purchase of Booker last June has been one of great disruption and management upheaval and of severe trading difficulties.

"The recovery of the group will be a major task during the current year."

He added: "Recoveries of this nature take around three years."

Simon Dunn, retail analyst at Dresdner Kleinwort Wasserstein, agreed with Mr Grimsey's assessment.

"These results have shown us that it will be a longer and rockier road to recovery than the market predicted."