Matalan is facing pressure from Tesco and Asda

It came as it said profit, before tax and exceptional items, for the year to 26 February, 2005, was �83.5m ($158m).

And total sales went through the �1bn mark for the first time at �1,102.9m, up 12.3% on the previous year.

The discount chain also announced it is to sell its Lee Cooper jeans business for �30m ($57m).

'Severe drop'

In morning trade in London, shares in Matalan fell by 3 pence to 190p.

In a tougher marketplace, our focus over the next twelve months is to manage greater efficiencies John King, Matalan chief executive See Matalan's share price Matalan's battle for sales

"It's a very severe drop in like-for-like sales," said Mark Charnock, retail analyst at broker Investec Securities.

"But the forecast of this year's profit coming at the bottom end of market expectations, if current trading conditions continue, is not as bad as one would have expected."

The UK retail market has been tough since the turn of the year, with sales falling at their fastest pace in 13 years during April, according to the CBI.

Many retailers - including home improvement group Kingfisher Plc and clothing chain Next - have blamed faltering consumer demand for poor sales.

'Better value'

Chief executive John King said over the past 12 months they had stabilized the business, grown profits and cut debt.

"We have achieved this by delivering better value to our customers through lower prices, stronger promotions, improved quality and greater choice, " he said.

"In a tougher marketplace, our focus over the next twelve months is to manage greater efficiencies."

Analysts have warned this year might be tougher for the west Lancashire-based discount retailer as rivals Marks & Spencer and Next lowered their clothing prices while Tesco and Asda expanded their clothing ranges.

Matalan launched its spring and summer lines early this year in a bid to try to boost its sales.

Last year, following problems with its jeans unit, Matalan was a rumoured takeover target for rivals ranging from Tesco to US giant Wal-Mart.

Matalan said it has completed 30 store refurbishments with another 90 to be rolled out over the coming three years. It also said a new distribution plant in Corby, Northants, should allow further expansion in the south of England.