Takeover-target Woolworths has beat hopes for annual profits - but warned shareholders that sales and margins were being hit by tough trading conditions.

Woolworths, which is waiting to see whether Apax Partners will make a formal £837 million takeover offer, said profits rose 4.7 per cent to £73.1 million in the year to January 29.

Analysts had expected a reversal in profits to about £69 million after the company brought forward its Christmas trading statement because it felt the City consensus was too high.

Even though like-for-like sales at its main high street chain fell 1.3 per cent last year, Woolworths managed to improve profitability by putting better products on its shelves, buying more cheaply and preventing a build-up of excess stock.

Woolworths said trading in February had been harmed by cold weather and the timing of the release of new CDs and DVDs, but sales had improved this month. The update was similar to comments on recent trading by rival retailers which have seen shoppers restrict their budgets after interest rates jumped over the past year.

Retailers are struggling as higher-interest rates curb spending by debt-laden consumers. Healthcare retailer Boots and camera firm Jessops both warned investors of weaker profits this month.

Woolworths initially spurned the advances of Apax, but agreed to open its books on Friday after receiving a revised proposal of 58.2p a share. Apax had previously offered between 50p and 55p per share.

Apax already owns fashionchain New Look and DVD specialist Silverscreen. It agreed, on Monday, to buy UK children's TV producer HIT Entertainment for £489.4 million.

Evolution Securities analyst Nick Bubb noted that the sales in March had been flattered by early Easter trade.

He rated the likelihood of Apax pressing ahead with a takeover at 80 per cent because of the attraction of Woolworths' entertainment and books distribution business, which grew sales by ten per cent to £1.2 billion last year.

However, Iain McDonald at Numis Securities, thought the harsher trading environment could be a stumbling block.

"This must increase the risk that Apax will walk away from the deal or seek to reduce its 58.2p indicative offer," he said.

Woolworths plans to double the number of stores refitted this year from 48 to 100 at a cost of around £3.3 million.

At the bottom line, profits slumped to £9.3 million from £66.7 million a year earlier after Woolworths was hit by the cost of selling some of its Big W stores.

Woolworths took a one- off charge of £60.9 million to reflect the cost of stock write-downs, property impairments, redundancy and consultancy fees. But it expected to book a credit of around £25 million in 2005 from the proceeds of store disposals.

Woolowrths said it was not declaring a final dividend due to the bid talks.

Chief executive Trevor Bish-Jones later indicated a buyer of the business would find plenty of scope to deliver further improvements.

Woolworths' shares closed at 54p down 1/2p.