Department store chain John Lewis issued a profits warning as its half-year profits fell by 43 per cent.

The chain blamed falling prices, £20 million one-off costs from a major store refurbishment programme and a change in its rules on paying out accrued holiday pay to staff for the collapse in profits.

Profits for the period fell to £38.5 million, from £67.7 million at the same point last year.

Chairman Stuart Hampson said: "Realistically we must expect our full-year profits to fall some way short of those of 1999."

John Lewis said the £20 million one-off costs compared with £3 million of exceptionals at the same point last year.

The main costs were a major refurbishment of the group's flagship Peter Jones store in London, which disrupted trade, as well as the redevelopment of 11 former stores bought from the Somerfield supermarket chain.

Finance director David Young said: "Quite simply, although sales have been better than our own estimates, what has happened is costs have run ahead of sales."

Yet, even without these one-off costs, pre-tax profits were still down on last year. Mr Young said the reason was deflationary pressures driving down prices, which were affecting retailers across the board, as well as the fact John Lewis had been selling a lot of low-margin goods such as large electrical items, computers and audio goods.

A decision by John Lewis' central council to change its rules regarding holiday accrual payments also impacted on profits, he added.

Traditionally staff agreed not to take any holiday in their first year of employment and accrue the pay for that period, which they received when they left the company. But the John Lewis council decided staff should be entitled to this windfall at any point before they left.This had cost the company £6 million.