JOHN Lewis posted a sharp drop in profits today after its “never knowingly undersold” promise meant it had to match heavy discounting by rivals.

The Partnership, which is owned by its 76,500 staff, reported a 55% fall in operating profits at its department stores division to £15.8m, despite a 1% increase in like-for-like sales in the six months to July 30.

The Waitrose supermarket arm reported a strong surge in sales, up 8.7% to £2.6bn, but profits dropped by 13.8% to £110.2m due to customer offers and investment in future growth, including new stores.

Across the group, first-half pre-tax profits fell by 18.2% to £90.4m, on a 6.4% increase in group revenues of £4.05bn.

Chairman Charlie Mayfield said trading conditions were set to remain challenging but added that sales were up by 7.4% in the first six weeks of the second half and recent investment has put it in a strong position to “seize the opportunity created by a rapidly changing retail environment”.

Mr Mayfield said the department stores had met the promise to match rivals’ prices both on the high street and also versus online competitors, despite the “extremely challenging'” conditions.

This helped it outperform competitors in all three of its core markets, but especially in electricals and technology where sales rose by 3.8%.

Online business John Lewis.com also saw 27% growth and could double annual sales to £1bn by 2014, the group predicts.

Waitrose had to absorb most of the increase in food prices over the past six months. It also launched a price promotion against Tesco in November, while its Essential Waitrose brand is now a £1bn-a-year label.

The supermarket, which had 259 stores at the end of July, will add a further 20 outlets – including smaller convenience stores – in the second half of the year.

John Lewis has just opened its new store in the Westfield centre next to the Olympics site, with two more at-home shops to open in Chester and Tamworth next month.

It has also announced plans to develop a new distribution centre in Chorley to support its expansion in the North of England and Scotland.

And among a range of new developments being trialled is a Beauty Retreat concept recently launched at John Lewis Cheadle.

A flexible format store is also due to be trialled in Exeter ahead of a possible roll-out into major centres. The new openings this year will mean another 1,000 jobs. Waitrose employed 2,400 extra staff in the six month period.

Second-half sales are up by 7.4% on last year, with Waitrose seeing a 10% lift, 3.9% like-for-like, and John Lewis up by 3.2% in total and 1.9% like-for-like.

Trading conditions are set to remain challenging for the remainder of the year, Mr Mayfield said, though he added that “current momentum is strong”.