News: WOW UPDATE 2-Australia's Woolworths cuts its way back to profit

• FY net profit A$1.5 bln vs net loss of A$1.2 bln
• Underlying net profit A$1.42 bln vs A$1.49 analysts
• Comparable store food sales up 3.6 pct

(Recasts throughout, adds investor quote and shares)

Australian grocery giant Woolworths Ltd (WOW) said on Wednesday a cost blowout from overhauling its department stores dragged underlying annual profit to its lowest in a decade, but a surge in food sales sent its shares to a two-year high.

The sharemarket reaction underscores the importance investors have placed on a fierce price war between No. 1 grocer Woolworths, smaller rival Coles, owned by Wesfarmers Ltd (WES) , and newcomer German discounter ALDI Inc .

Even as Woolworths unveiled its lowest underlying yearly profit since 2007 and its lowest final dividend in about the same period, it cheered investors by trouncing Coles in food sales growth, a sign its strategy of aggressive price cuts was working.

"The first thing they needed to do was stabilise their competitive position and they've clearly done that, perhaps even done a bit more," said Ric Spooner, chief strategist at CMC Markets.

Woolworths shares rose as much as 2.5 percent in early trading, their highest intraday level since 2015, although profit-takers crimped the gains to about 0.5 percent by midsession, while the broader market was flat.

Net profit was A$1.53 billion ($1.21 billion) for the year to June 25, recovering from a net loss of A$1.2 billion the previous year mostly caused by a one-off charge to exit a failed foray into hardware.

Excluding one-offs, net profit from continuing operations fell 3.6 percent to A$1.42 billion due to the cost of restructuring budget department store chain Big W. Analysts had expected an underlying result of about A$1.49 billion.

But it was Woolworths's grocery sales - which account for about two thirds of its total revenue - which impressed investors.

Comparable store food sales rose 3.6 percent, beating Coles owner Wesfarmers' food and liquor sales growth of 1 percent. Pre-tax profit for food at Woolworths declined 2.4 percent because of staff training expenses in the first half, and the company noted that second-half pre-tax profit for food grew 13 percent.

Woolworths said pre-tax losses from budget department store chain Big W grew tenfold to A$150.5 million as the company overhauls that business unit - a move it has done several times in recent years.

Woolworths CEO Brad Banducci said "this is not our first crack at resetting this business" and that Big W would hoped to rebuild "price trust" by discounting.

Big W is the Woolworths unit which would compete most directly with global online giant Amazon.com Inc AMZN.O , which has said it will open in Australia, but Banducci said "most of our challenges with Big W at this point are self inflicted".

Woolworths declared a final dividend of 50 Australian cents per share, up from 33 Australian cents per share a year ago but its lowest final dividend since 2008. ($1 = 1.2639 Australian dollars)