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LISBON, March 4 (Reuters) - Portuguese retailer Jeronimo Martins on Wednesday posted a worse-than-expected 36.5 percent drop in quarterly net profit due to increased costs and food deflation amid tough price competition, even as its sales increased.
It said it still saw deflation as a major challenge this year, at least through the first half, but did not expect profitability at its key Polish unit to fall much further in 2015 after its decline upset the market earlier this year.
Net profit at the company, which is the largest food retailer in Poland and the second-largest domestically, fell to 65 million euros in the fourth quarter, while earnings before interest, taxes, depreciation and amortisation (EBITDA) fell almost 9 percent to 186 million euros.
Analysts in a Reuters survey had forecast, on average, a net profit of 85 million euros and EBITDA of 189 million.
Total net sales rose 7 percent to 3.35 billion euros in the quarter.
"Despite the strong market share performance of our banners, consolidated results were impacted by ... strong food deflation affecting top line, cost inflation and start-up losses," it said, referring to its new Ara supermarket chain in Colombia and the Hebe pharmacies network in Poland.
Operating costs rose 11 percent to 526 million euros.
Its main unit - Polish discount store chain Biedronka - saw its EBITDA margin, a measure of profitability that analysts look closely at, fall to 6.8 percent for all of 2014 from 7.8 percent in 2014.
But Jeronimo Martins said the margin this year would be at least 6.5 percent.
It expects to boost sales at Biedronka by increasing its offering and competitiveness to regain sales growth at same-store level after a fall of nearly 1 percent in 2014. Sales increased thanks to new stores.
Jeronimo Martins plans to increase investment this year to between 500 million and 550 million euros, 60 percent of it for the Polish unit, from 470 million euros in 2014. (Reporting By Andrei Khalip, editing by David Evans)