UK's John Lewis warns on profit and 'no deal Brexit' chaos

By James Davey and Sarah Young

LONDON (Reuters) - John Lewis Partnership warned of a big fall in annual profit on Wednesday, deepening a crisis in Britain's department store sector, and said chaos could ensue if the country crashed out of the European Union without a deal.

A string of UK store groups have gone out of business or announced shop closures this year as they struggle with subdued consumer spending, rising labour costs, higher business property taxes and growing online competition, particularly from Amazon.

Department stores have been especially hard hit, with House of Fraser closing around half its shops, Debenhams slashing profit forecasts and Marks & Spencer planning to shut 100 UK shops by 2022.

John Lewis, which also owns upmarket Waitrose supermarkets, has long outperformed rivals. But its warning underscores the challenges facing a sector that has been the mainstay of town centres and shopping malls for more than a century.

The 154-year-old group, owned by its 85,500 workers, or partners as it calls them, said it expected 2018-19 profit would be "substantially lower" than the previous year's 289 million pounds, which was a 22 percent drop on 2016-17.

Finance chief Patrick Lewis said forecasting was incredibly difficult.

"The market is turbulent and dynamic, at the same time the economy is uncertain and we've got Brexit hovering over us which will have a significant impact on consumer confidence in the second half," he told reporters at a strategy update.

With only nine months left until Britain is due to leave the EU, there is little clarity about how trade will flow. Big business has started to warn of the consequences, with Siemens, Airbus and BMW all saying that their businesses would be hurt by a disorderly Brexit.

"A no deal Brexit is in my view a pretty unthinkable scenario," said partnership chairman Charlie Mayfield.

"We (the UK) are unprepared for it," he said.

"If you were to leave without ... preparing it well, the chaos that would ensue would be something that I don't think any responsible person should really contemplate."

STORE DISPOSALS

The partnership said that while profit at Waitrose would grow, it would decline at John Lewis department stores and big investments in technology would also drag on group profit.

The group, which trades from 353 Waitrose shops and 50 John Lewis stores, said it would shed stores - either by closing them, selling them or not renewing leases - at a similar rate to recent years. It announced the disposal of four Waitrose convenience shops and one small Waitrose supermarket.

The partnership emphasised its future would be about focusing on differentiation and innovation in products and customer services rather than getting bigger.

It will continue to invest at a rate of 400-500 million pounds per year as its strategy is to maintain investment whatever the economic environment, it added.

It will also seek to strengthen its balance sheet by 500 million pounds over three years by extracting more value from its property, for example by developing housing, as well as from savings in operating costs and pension liabilities.

The partnership also said it would rebrand its department stores "John Lewis & Partners" and its supermarkets "Waitrose & Partners" from September to put greater emphasis on its unique employee-owned model.

"This is no time to bring the legions closer to Rome. In this market you can't win just by playing defensively. You have to win by driving newness and innovation, said Mayfield.

(Editing by Keith Weir and Mark Potter)