News: WOW UPDATE 2-As Wesfarmers profit dives, price cuts at Coles unit fuel Australia deflation...

• FY net profit A$407 mln vs A$2.44 bln a year ago
• Earnings well below A$1.2 bln analysts' estimate
• Hit by writedowns in coal, discount department stores
• Grocery price cuts slows Coles revenue, profit growth
• Price war with Woolworths showing up in inflation data

(Recasts, adds executive and analyst comment)

Australian retail to resources giant Wesfarmers Ltd (WES) said it skidded to its worst profit in 15 years, hit by hefty one-off charges, as it flagged aggressive supermarket price cuts likely to fuel deflation already hurting the country's economy.

Perth-based Wesfarmers, Australia's No.1 company by sales and owner of the Coles supermarket chain, said on Wednesday net profit tumbled more than four-fifths to A$407 million ($310 million) in the 12 months ended June, well below analyst estimates.

The firm, which operates Kmart and Target stores, had warned in May it would book hefty impairment charges to cover discount store restructuring and soak up lower coal prices. But it set alarms bells ringing for the Australian economy on Wednesday, saying grocery price cuts at Coles squeezed April-June revenue lower despite volume sales hitting a two-year high.

"Absent that deflation we would've grown our food and liquor profits in line with our sales," Coles managing director John Durkan said on a conference call to analysts after the earnings report. Coles' earnings before income and tax grew 4.3 percent in 2015-16, down from 6.6 percent growth the prior year.

The impact of a price war between Woolworths Ltd (WOW), Australia's biggest supermarket operator, and nearest rival Coles is such that its effects are being felt in Australia's headline consumer price index (CPI). Woolworths reports earnings for the year ended June on Thursday.

What's more, the pair now face a growing challenge from German discount grocer Aldi [ALDIEI.UL].

Australia's CPI rose just 1 percent for the year to June, while underlying inflation slowed to a new trough of 1.5 percent. Expectations for future inflation have also fallen and are being built into pay negotiations, leading to a self-fulfilling cycle of wage deflation.

"When you've got consumer spending running in to headwinds and you've got no room to increase your prices because of that, it makes it very difficult to get the most out of your business," said Tom Piotrowski, a market analyst at Commonwealth Securities.

Shares in Wesfarmers were down 2.18 percent at the close of trade on Wednesday.

Wesfarmers' said it would pay final dividend of 95 cents, for a total dividend of A$1.86, compared to a A$2 total dividend last year.

($1 = 1.3135 Australian dollars)