By Himanshi Akhand

(Reuters) - Shares of Woolworths climbed on Wednesday after the Australian grocer declared a special dividend and also said its full-year profit dropped in line with analysts' forecast as it slashed shelf prices to compete with rival Coles.

Woolworths' stock rose as much as 2.3% to its highest level in almost six months, as of 0035 GMT.

The supermarket chain grapples with declining performance in key divisions amid inflation-induced margin pressures and escalating operational costs, while intense competition has made it hard for Woolworths to adapt to evolving consumer trends.

The company cut down prices and passed on lower costs to customers to address the rise in competition and tackle cross-shopping trends.

Consequently, inflationary pressures in its food businesses and BIG W segment moderated significantly in the second half and item growth slowed, leading to cooling sales momentum.

The grocer's total group sales for the year ended June rose 3.7% on a normalised basis to A$67.92 billion ($46.13 billion).

"Looking ahead, improving customer scores, item growth, and lower inflation provide reason for optimism," outgoing CEO Brad Banducci said in a statement.

"However, we also know that our customers remain under significant mortgage and rent-related financial stress and anticipate them to remain cautious with the trading environment expected to be challenging for the rest of the financial year."

Woolworths said sales in its biggest earner, Australian Food, were up about 3% in the first eight weeks of fiscal 2025.

"Sales momentum in Australian Food has improved in the trading update with the gap to Coles mostly closed. We believe this will allay fears of a significant rebase under the incoming CEO," Citi analysts wrote.

The company posted annual underlying net profit after tax of A$1.71 billion for the year, largely in line with a Visible Alpha consensus estimate of A$1.72 billion.

It also declared a final dividend of 57 Australian cents per shares, along with a special dividend of 40 Australian cents apiece.

($1 = 1.4723 Australian dollars)

(Reporting by Himanshi Akhand and John Biju in Bengaluru; Editing by Maju Samuel and Sherry Jacob-Phillips)