However, the variety group, which trades as Instore and Poundstretcher, said turnover rose 4.3 per cent to£280.1 million in the 52 weeks to February 24. A sale of the business is understood to be imminent.
Instore chairman Christo Wise said: 'While this is clearly disappointing to be reporting a worsening of our loss-making position, this is largely a reflection of the significant changes that have been introduced across the business.'
However, the group said recent sales trends are strong, with like-for-likes up 7.9 per cent in the 11 weeks to May 12. Comparing the three-week Easter period with Easter last year, like-for-likes rose 9.4 per cent.
A modernised Poundstretcher fascia and interior was launched during the year, which has been introduced to 26 stores. Stock levels were also reduced by 35 per cent, releasing£14 million from working capital.
Wise said: 'Enhanced product offer, promotional activity and marketing have all led to a much stronger value message with, overall, encouraging progress being made into the commencement of the new financial year.
'Although there are many challenges still to be addressed, I have no doubt that the changes seen in 2006/2007 provide the business with a much firmer platform from which to operate and, despite the disappointments of recent years, the board remains confident of future success.'
Seymour Pierce analyst Richard Ratner said: 'We edge our estimate for the new year down from a profit of£1 million to a loss of the same magnitude and for the following year look for a profit of£4 million. All relatively encouraging, but very theoretical, as the South Africans are about to sell a 29.9 per cent stake to what we believe is a trade competitor.'