Morrisons is finding converting Safeway stores challenging

Morrisons said profit margins would remain "significantly" below 2004 levels for much of this year.

It said group performance was suffering from the cost of running dual systems during the merger process.

Morrisons' finance director quit shortly after its last profits warning in March and has yet to be replaced.

Morrisons became the UK's fourth-largest supermarket chain when it swallowed Safeway for �3bn last spring, but the merger has been dogged by logistical and administrative problems.

Signs of improvement

The supermarket chain said its overall group performance remained "heavily impacted by the temporary dual running costs of distribution, administration and IT functions".

It said these duplicate costs would "remain higher and take longer to eliminate" than previously thought.

"No significant reduction is expected until the completion of the programme to convert the acquired Safeway units to the Morrisons format in November 2005," said the firm.

But it said the process of converting Safeway stores to the Morrisons format was "proceeding well".

Sales at converted stores were "very encouraging" and provided "the framework for a significant improvement in performance" in 2006-07.

Morrisons' shares closed up by one and a quarter pence at 187.5 pence.