Department store group John Lewis has reported a £10m fall in half-year profits after figures were hurt by higher pension costs and increased spending on its stores.

The group, which also owns the Waitrose supermarket chain, said profits fell to £34m for the half-year to July 27, although sales posted a five per cent rise to £2.18bn.

Profits were hit by costs of its generous non-contributory pension scheme, increasing 14 per cent to £33m, while investment in new branches and modernising stores meant its interest bill grew ten per cent to £17m.

The group's insurance premiums also rose steeply following increased market rates in the wake of the September 11 attacks.

And the group was hurt by £4m of one-off costs relating to moving its computer centre to Bracknell.

John Lewis said sales at its 26 department stores, which include the former Bainbridge store in Newcastle's Eldon Square, as well as branches in Aberdeen, Southampton, Bristol and Norwich, had topped the £1bn mark for the first time during the half year.

Sales rose six per cent to £1.01bn at the stores, in spite of deflationary price pressures on much of its merchandise.

Sales at the 136-strong Waitrose chain rose 3.5 per cent to £1.17bn, which it said was achieved in the face of "aggressive investment by larger competitors" and poor summer weather affecting sales of fresh food.

The group has also been modernising its department stores, changing from locally-known names, such as Bainbridge, to the John Lewis brand and said 22 stores would come under the flagship name by the end of the year.

John Lewis added that both divisions had made a "promising start" to the second half of the year, with both the department stores and supermarkets seeing sales rise five per cent.

However it said: "The group continues to keep its cost base under review, especially in light of the prevailing uncertainty in the economic outlook and consumer spending."

John Lewis is run on a partnership basis, where its 58,000 staff share in its profits as well as sharing control of the company through elected representatives.

Bonuses equivalent to around ten per cent of annual salary are paid to staff at the end of the financial year.