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UK's Greggs warns that jump in costs will dent margins

* Ingredients cost rises compounded by labour inflation

* 2016 pretax profit 80.3 mln stg, up 10 pct

* Shares (Berlin: DI6.BE - news) fall as much as 5.4 pct (Recasts with CEO, analyst comment, shares)

By James Davey

LONDON, Feb 28 (Reuters) - British baker Greggs warned on Tuesday that profit margins this year would be dented by a jump in the price of ingredients, particularly dairy and proteins, as well as increased labour costs.

Shares in Greggs (Stuttgart: 41G1.SG - news) fell by as much as 5.4 percent after the company reiterated its concern about the margin outlook, taking the shine off a 10 percent rise in full-year profit.

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"We do think there’ll be a modest impact on margins this year because we suspect that we won’t be able to completely mitigate it (cost pressure) and won’t be able to completely pass it on (to customers)," Chief Executive Roger Whiteside said.

Whiteside said that Greggs is having to pay more for all of its ingredients, but he highlighted dairy and proteins, such as pork, chicken and fish, because the percentage increases are "big numbers in the teens".

The higher costs reflect a combination of a weaker pound since Britain's vote to leave the European Union and commodity price cycles, he said, adding that Greggs is also having to deal with labour inflation as a result of the government's introduction of the National Living Wage and apprentice levy.

The company, which is transforming itself from a traditional bakery business into a food-on-the-go retailer, made a pretax profit before one-off items of 80.3 million pounds ($99.8 million) for the year to Dec (Shanghai: 600875.SS - news) . 31, ahead of analysts' forecasts and up from 73 million pounds in 2015.

Total (LSE: 524773.L - news) group sales rose 7 percent to 894.2 million pounds, with sales at company-managed shops open for more than a year rising by 4.2 percent. A small percentage of Greggs' outlets operate on a franchise model.

Greggs said if benefited from an improved product range, extending choice in hot drinks, hot food and healthy options. It refurbished 208 shops and opened a net 66 shops, taking the total to 1,764.

Trading in 2017 has started in line with expectations, the company said, with like-for-like sales at shops which that it manages rising 2 percent in the eight weeks to Feb. 25.

Whiteside said that he was "pretty happy" with trading in the new year but that the UK consumer outlook is more challenging than it has been in recent years.

"There are fewer people out shopping. Cost inflation is here to stay and when that comes through in pricing that will hit disposable income because wages are not rising at the same rate," he said.

Shares in Greggs initially fell 40 pence at 967 pence before recovering to 974 pence, down 3.6 percent, at 1121 GMT, valuing the business at about 1 billion pounds.

Analysts at Peel Hunt cut their recommendation to "hold" from "buy".

"Greggs’ strategy and tactics are spot on in the tough food-on-the-go sector, but we suspect that positive surprises are unlikely in the near future," the broker said. ($1 = 0.8050 pounds) (Editing by David Goodman)