John Lewis hit by credit crunch as profits fall by more than a third

The chain, with branches from Southampton to Aberdeen, said its profits fell by more than a third to £40million as the impact of the credit crunch ravaged household budgets.

The poor figures from a company usually regarded as one of the strongest names on the High Street will further alarm already jittery traders in the financial markets.

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They come as another usually resilient retailer, Argos, said its own sales were dropping fast.

John Lewis chairman Charlie Mayfield said he could see no sign of improvement this year or next.

Retailers are bracing themselves for the worst Christmas in a quarter of a century.

Mr Mayfield said: 'After the initial shock of the credit crunch last summer, the economic climate has become progressively more difficult, consumer confidence has hit a record low and the retail market has slowed markedly.'

In the first half of the year sales at the 25 John Lewis department stores were almost unchanged at £1.24billion. But like-for-like sales fell one per cent and operating profits slumped 34 per cent.

The only glimmer of good news was that sales in the first few weeks of the second half of the year were slightly up on last year.

But Mr Mayfield warned that conditions will remain 'challenging'.

Consumers have reined back because of big increases in their monthly bills, particularly food, energy, mortgages and petrol and worries about the falling value of their homes.

John Lewis's flagship branch in London's Oxford Street performed well after a major refurbishment.

John Lewis's flagship store on London's Oxford Street has ridden the crisis well but other branches have suffered

But Peter Jones, the company's store in fashionable Sloane Square, suffered particularly badly because of City job cuts and falling bonuses. Sales there slumped 10 per cent in the first six months of the year.

John Lewis's sister business, Waitrose, also saw profits fall, but only by eight per cent to £103million.

Argos, which had up to now bucked the trend of slower consumer spending, today admitted it was no longer immune.

During June, July and August like-for-like sales went into reverse, having been flat in the first quarter of the financial year.

They fell by 5.8 per cent, taking the decline for the half year to three per cent.

But Terry Duddy, boss of Argos owner Home Retail, was defiantly upbeat today.

He said: 'Going forward we see quite a difficult September and October. But we expect, just as we have seen in the last five years or so, that the consumer will again come out and shop at Christmas.'

Argos makes two thirds of its profits in the second half of the year with the bulk of that based around Christmas.