Asda has reported a fall in 2017 profits following the decision to cut prices to tempt back shoppers who have switched to discounters Aldi and Lidl.
The Leeds-based grocer said profits fell 13 per cent last year to £735m, down from £845m in 2016.
The group said trading was in line with expectations and the results show its recovery is on track.
Asda, which is set to merge with Sainsbury's in a £12bn deal, said it returned to underlying sales growth in 2017, with sales up 0.5 per cent, a big improvement on the 5.7 per cent fall it reported the year before.
Sainsbury’s and Asda announced plans to combine in April in a deal which will see Britain’s no.2 and no.3 supermarkets respectively overtake Tesco as Britain’s biggest supermarket group.
The deal comes just as a turnaround plan for Asda gains momentum.
Asda said it has benefited from investing in lower prices for customers and improved service in stores and online.
Asda's CEO Roger Burnley said: “Our 2017 accounts reflect a solid performance and a strong, well-managed business.
“During the year momentum returned driven by a series of planned investments in lowering prices, further improving quality and innovation in our own brand ranges and providing an even better shopping experience whether in store or online.”
"Our customers have responded well to this strategy and the momentum of 2017 has continued into the first quarter of 2018."
In the company's strategic report, Asda's finance chief Alex Russo said the business is facing challenging conditions.
"The consumer environment continues to be challenging, with discretionary income marginally decreasing during the year," he said.
"Customers remain cautious in their spending habits and we expect conditions to remain tough for our customers, with price being a key consideration."
Over the year, the Walmart-owned retailer opened three superstores, five supermarkets and a centre for servicing online deliveries.
It is hoping to merge with Sainsbury's in a deal which will enable it to cut prices further, although the tie-up still requires regulatory approval.
Sainsbury's CEO Mike Coupe has said the merger will produce £500m in cost savings.
Consumers have been promised cheaper everyday items, although it is not yet known where the price cuts will fall.
The Competition and Markets Authority is scrutinising the deal and it is expected that scores of stores will have to be offloaded as part of the competition review.
Asda has also been axing jobs in the UK, announcing in January that 28 roles will go at its head office on top of 300 job losses revealed in September as part of a major cost-cutting drive.
Earlier this week, figures from Kantar Worldpanel showed that Morrisons and Asda were the star performers as the grocery sector clocked up strong growth in the three months to May 20, boosted by the hot weather, the Royal Wedding and the FA Cup Final.
Kantar said that Morrisons, with growth of 2.9 per cent, led the pack, closely followed by Asda, which showed growth of 2.8 per cent, considerably ahead of market leader Tesco, which had growth of 2.2 per cent, and Sainsbury's, where growth was 1.0 per cent.