Harvey Nichols reported a 20 per cent slide in profits after being hit by the post-September 11 drop in tourism.

But it said trading was improving.

The group, which has its flagship store in London's Knightsbridge and a store in Leeds, said pre-tax profits for the year to March 30 slid to £12.5 million, although sales were up 2.5 per cent at £140.4 million.

Profits were hit by a substantial reduction in the number of UK customers and tourists, especially American visitors, coming to its London store in the months following the terrorist attacks in the United States.

As a result, it cut prices aggressively in its January sale to make sure it did not have old stock left over, meaning margins have slipped.

Its London restaurants, Oxo Tower and Prism, were hit by the downturn.

However, chief executive Joseph Wan said he was seeing signs of improvement.

Tourist numbers, although not back to previous levels, were slowly returning.

For the nine weeks since March 30, like-for-like sales, which strip out the effect of store expansions and openings, rose 3.7 per cent against last year.

Trading at Oxo Tower had recovered rapidly, although Prism was taking longer to bounce back.

In contrast to the slide in trading in London, the Leeds store recorded a 20 per cent rise in sales over the last year.

Harvey Nichols plans to reduce its dependence on London by opening further stores regionally.

Mr Wan said the group would open a new store in Edinburgh in September and one in Manchester next autumn.

He was also planning to open further small-format stores in addition to shop in Birmingham, opened in October. Sales at the Birmingham store had been very encouraging.

Shareholders will be paid a dividend of 7.7p, the same as last year. Shares in the group rose two per cent to 212.5p.