Profits at department store and supermarket chain John Lewis have tumbled by more than a quarter in the first six months of the year, providing the clearest evidence yet that the credit crunch and economic slowdown are biting.

Profits at department store and supermarket chain John Lewis have tumbled by more than a quarter in the first six months of the year, providing the clearest evidence yet that the credit crunch and economic slowdown are biting the middle classes where it hurts them most.

The unlisted retail bellwether of upmarket shopping also said it expected the outlook on the high street to remain "challenging" next year - although it added in its latest update for the week to September 6 that sales had climbed 9.2% against the same week last year.

However, sales at John Lewis - which is owned by its 69,000 workers and runs 27 department stores and 192 Waitrose supermarkets - have fallen for 11 out of the past 17 weeks.

Because of the employee-owned nature of the group, which is run by a trust that shares the profits with its workers, staff shared a record £181.1m bonus pot in March, although this is likely to tumble dramatically in the much tougher retailing environment this year.

The group yesterday unveiled a pre-tax profit of £107.3m in the six months to July 26 - a slide of 26% from £146m during the same period last year.

At the same time, the 144-year-old company recorded a 3.6% rise in sales to £3.3bn.

However, John Lewis's latest set of accounts also revealed that operating profits at its department stores had fallen 34% to £40m during the period, as sales of homeware goods were hit by a slump in UK housing market.

Lesley Ballantyne, managing director of the department store in Glasgow, remained bullish, in spite of the fact that sales during the first week in September plunged 4.4% against the same week last year at the Buchanan Galleries behemoth, and marked it as the group's third-worst performing store.

She said: "We're a very resilient business and we've shown that many times over."

"Homeware is definitely suffering because people tend not to buy things like a new carpet or a new suite unless they're moving house, so the slowdown in housing is affecting us.

"But fashion and beauty products are doing well. People are still prepared to splash out on that little bit of luxury, and we'll continue to take market share by focusing on the things we do best - quality products and a service that's second to none."

The group added that its stores will be much less dependent on "home" goods for the rest of the year. There will be a bigger role for better-performing fashion lines, where comparative sales across the group rose 5%, as well as gifts in the run-up to Christmas.

Online sales have also thrived, up 30%.

Meanwhile, operating profits at its upmarket Waitrose supermarkets slid 8% to £103m, marking a middle-class flight from luxury to value.

Waitrose's like-for-like sales were 2.5% ahead in the first half, but this has swung to a 1.1% fall in the six weeks since the end of July.

The decline comes despite £30m spent on lower prices and promotions to protect customers from the full effect of food price inflation.

Marisa Cassoni, John Lewis's finance director, said yesterday the chain will continue to cut prices and invest to maintain its competitive edge.

She said: "Two-thirds of our profits come through in the second half and it's far too early to tell what the (full-year) outturn will be.

"We see plenty of opportunity going forward to maximise our profit."

John Lewis is also launching new stores and looking to open a branch in Dubai later this year in a bid to defend against the downturn.