Morrisons has recorded a rise in annual profits but cautioned that 2011 will be challenging.

The UK grocer today (10 March) recorded a 22.5% increase in net profit to reach GBP632m (US$1bn) for the year ended 30 January.

Turnover was up 7% to reach GBP16.5bn, while like-for-like sales, excluding fuel and VAT, were up 0.9%.

Alongside the results, Morrisons also announced that it has taken a stake in New York-based online grocer FreshDirect, and will launch an online grocery offer in the UK in the coming two years.

The retailer will invest GBP3bn in adding some 2.5m square feet of new selling space in the three years to January 2014 and in developing its online offer.

The retailer announced it has identified its three locations to trial its convenience offer, which will be called ‘M local’, and the first store will open in July.

It also plans to buy back some GBP1bn in shares over two years and increase its dividend by a double-digit percentage over the next three years.

“Our plan to make Morrisons ‘Different and Better than Ever’ has great momentum, with store trials under way that are yielding exciting results, our first convenience store sites secured and important e-commerce investments in
FreshDirect and announced,” said CEO Dalton Philips.

However the retailer also pointed to a “challenging” economic backdop in 2011, with “higher taxes, government spending cuts, inflation and rising unemployment all continuing to weigh on consumer confidence and disposable incomes”. It added that its “unique position” of high quality food at great value prices means that it is “well positioned to face these changes and deliver further profitable growth”.

Morrisons shares were up 2.92% at 288.7p at 10:13 GMT.

Click here for Morrisons’ full earnings statement. Check back later for further insight into the retailer’s plans.