The chain beat analyst predictions to post an underlying pre-tax profit of £267m for the year ending 25 March 2006 - up from £238m the year before.
Total sales rose 5.7 per cent to £16.9bn, while like-for-like sales excluding petrol rose 3.7 per cent.
During the year, the company cut 8,500 product prices, initiating in-store price deflation of 1.5 per cent as it fought to compete with the low-priced market leaders Asda Wal-Mart and Tesco.
Operational profit moved into the black, reaching £58m compared to 2005's loss of £187m.
Non-food ranges saw an eight per cent sales growth, and now account for 10 per cent of all purchases made. But the retailer falls behind main competitors Tesco and Asda in this department, and chief executive Justin King has made the issue vital to the firm's growth strategy. He hopes to gain £700m in additional non-food sales over the next three years.
"We have made good progress during the year and we are on track in our Making Sainsbury's Great Again plan," King said.
"However, it is early days in our recovery. We still have much to do to drive further improvements but our focus remains on putting the customer at the heart of all decision-making," he added.
The company opened 15 new supermarkets and 34 convenience stores over the last year, taking the total number to 752. The new space made a significant contribution to sales growth during the year, with 367,000 square feet added - an increase of 2.2 per cent.
But this was not quite in line with King's progress statement made last December which revealed an ambitious plan to double the amount of retail space Sainsbury's opens each year, in a bid to overtake Asda and cut Tesco's lead in the supermarket league table.
He said the chain will open new space equivalent to five per cent of the company's total floor space every year for the next five years - most coming from new store openings but some from extensions.
The new targets, which if achieved will be the equivalent of opening 25 medium sized stores a year, are part of the retailer's plans to increase sales by £2.5bn (€3.5bn) by 2008.
But the company has a long way to go before it can turn around nearly a decade of disappointing market performance in the face of Tesco's formidable rise to the top.
Goldman Sachs still indicated that the operational improvements seen "are not enough to carry the current operating margins to the industry-beating level that the current share price implies."
"It will therefore be crucial for the markets to get an update on any cost cutting initiatives, or a clear explanation as to how a full margin recovery is feasible within the next two years," the analyst added.