Woolworths Ltd, Australia’s largest retailer, saw sales growth from its core domestic stores ease in its fourth quarter as deflation picked up.

After adjusting for the timing of Easter, comparable-store sales from Woolworths’ Australian Food and Liquor division increased 2.9% in the three months to the end of June.

Annual sales were up 2.7%, showing Woolworths enjoyed faster growth in the final quarter of the year. However, comp-store sales from the division increased 3.1% in the third quarter.

Woolworths said deflation had picked up in the last quarter of the year. It said average prices fell 3.5% compared to a drop of 2.5% in the third quarter. In May, Woolworths announced plans to cut prices on “hundreds” of grocery products in its latest move in its battle with rival Coles.

Tjeerd Jegen, MD for Coles’ Australian supermarkets and petrol business, said: “The launch of our More Savings Every Day’ marketing campaign at the end of the fourth quarter has been well received by customers with hundreds of prices reduced on branded and own-brand products that customers buy the most. This is one of many examples of how we continue to provide more savings for our customers as evidenced by the continued decrease in our average prices.”

Fourth-quarter revenue from Woolworths’ Australian Food and Liquor division was up 4.4% when adjusted for Easter and the impact of the 53rd week in the financial year. Annual sales increased 4.7% after the extra week of trading was removed from the results.

In New Zealand, Woolworths saw sales from its supermarkets grow 5%. Comparable-store sales were flat for the fourth quarter and for the year.

Reflecting on the company’s results, Woolworths CEO Grant O’Brien said: “Momentum continues to increase in Australian Food and Liquor with comparable sales growth for the second half higher than the first half and the prior year.”

He added: “We have achieved solid full-year sales growth, which is particularly pleasing when measured against challenging retail conditions and an economic environment underpinned by consumer uncertainty and low growth in disposable income. The fourth quarter result was pleasing given these challenging economic conditions were particularly evident as the quarter progressed.”

Nevertheless, shares in Woolworths closed down 1.63% at A$33.22.

Click here for the full statement from Woolworths.