Discount retailer Poundland set the scene for further expansion today as it reported a surge in annual profits, but warned of a tough start to the new financial year.

Chief executive Jim McCarthy said changes to shopping habits meant consumers across the spectrum were hunting for bargains and that the business would prosper even as the economy improves.

He said Poundland and its Dealz brand operating in Ireland were “still under-exploited... with many more years of new store opening growth”.

Underlying pre-tax profits rose 18.6% to £43.7million in the year to March 29. The group disclosed earlier this year that annual sales topped £1 billion for the first time.

But Mr McCarthy said the first half of the current financial year would be “relatively subdued”. It compares with a period last year when it benefited from a late Easter, good weather and the loom band craze.

Sales at the start of the current financial year, for the 11-week period ending on June 14, were ahead by 4.1% on a constant currency basis, a marked slowdown from the full year growth rate of 11.8%.

Poundland also said it expects a £4 million hit to full-year results for 2015-16 from the impact of the weak euro.

The group had 588 stores at the end of the 2014-15 period after opening 60 new outlets and plans to open another 60 for the current year including 10 under the Dealz brand in Ireland.

It also aims to have 10 Dealz stores operating in Spain and Mr McCarthy said trial openings there so far had “got off to an encouraging start”.

Meanwhile, the group has agreed the £55m takeover of rival 99p stores, which has 251 sites, though the transaction faces an in-depth probe from the Competition and Markets Authority. Poundland said it was disappointed at the decision.

The group, which floated on the stock market last year, has said that its long-term target is to operate more than 1,000 stores in the UK.

Chief executive Jim McCarthy said: “I am pleased to report a record year of sales and profit growth for Poundland.

“Notwithstanding a challenging start to the year, I expect to see a year of growth for Poundland as we have a very strong opening programme and we will continue to be the standard bearer for genuine and amazing value.

“Structural change has occurred in shopping throughout the UK over the last several years. Consumers across the socio-demographic spectrum now appreciate value more than ever before.

“Poundland’s single price point will continue to help consumers plan their household budgets with certainty and confidence, even in improving economic conditions.”