PERFUME retailer Merchant reported a 22 per cent rise in annual sales yesterday - despite difficult trading at its North-East department stores.

Merchant Retail said the 98 outlets of The Perfume Shop were the main driver of growth, increasing profits by nearly a third.

But the company's department stores in Sunderland, Hexham, Jersey and Warwickshire saw sales dip in the "cold winds" of difficult trading.

Shares in the company fell nearly six per cent as the group also warned trading conditions would continue to be difficult during the current year.

Pre-tax profits rose to £16.5m in the year to March 27 after a nine per cent increase in sales to £178.1m.

Merchant's five department stores recorded a fall in sales in the face of increased competition and price-cutting.

The group said the department store industry had to review the way it conducted its business - promotional days were failing to produce customers.

"There is much to be said for the policy of other highly successful high street retailers, who stick religiously to two sales a year - the customer then knows when to expect a bargain," Merchant said.

In the division's Joplings department stores, Sunderland was the worst-hit, with a seven per cent fall in sales.

The Leamington store was hit by new centres, such as Birmingham's Bull Ring, and is to close.

Gruchy - a leading department store in the Channel Islands since 1810 - had a difficult year, with sales falling five per cent and profits down 33 per cent.

However, this was offset by profits at The Perfume Shop, which soared 30 per cent to £14.7m. During the year, 13 stores were opened in the UK and Ireland and another seven were due to open in the current financial year.

Merchant said it was confident of further progress despite the challenging year ahead.

Analyst Richard Ratner at broker Seymour Pierce said: "If it was just the Perfume Shop, we would be very enthusiastic, but the department stores are a mill stone in our eyes, albeit still a profitable one."