The chairman of John Lewis gave warning that interest rate cuts may not prevent a severe downturn on the high street this year after revealing fresh signs yesterday that the credit crunch is affecting the previously untouchable retailer.

Charlie Mayfield announced record annual profits alongside the biggest staff bonus for a decade – 20 per cent of pay – but said that trading had become far more challenging since the new year. Like-for-like sales across John Lewis’s department stores rose only 0.9 per cent in the five weeks to March 1, compared with more than 6 per cent before Christmas.

Sales of homewares were down 4 per cent, the worst rate at the employee-owned business for four years. Mr Mayfield said: “The conditions we are facing this year are quite different to this time last year. There’s no doubt the market has toughened.

“I can’t remember a time when there has been such an unrelenting run of bad news from the financial sector. The question was always whether the problems would spill over into consumer markets, but from much of what we see that is very clearly happening.”

He added: “There is a possibility of an upturn in the fourth quarter, but given the state of the financial markets, rate cuts may not be as effective as they have been in the past at stimulating consumer activity. What matters is the amount people are paying on their mortgage and their personal debts. A rate cut is not going to magically solve all these issues.”

The gloom hit shares at rivals, with Marks & Spencer down 11½p to 389¾p and Debenhams drifting 1p to 64¾p. John Stevenson, retail analyst at Shore Capital, said: “We have been talking about a slowdown for a long time. Clearly it’s here.”

Mr Mayfield insisted that John Lewis was far better placed than its rivals to cope with the downturn and would be increasing capital expenditure by nearly £100 million to £450 million in the coming year.

He added that sales at Waitrose, the John Lewis-owned supermarket chain, were gathering momentum as consumers cut back on eating out. Waitrose recorded like-for-like sales growth of 5.1 per cent in the five weeks to March 1. Annual results out yesterday showed that pretax profits across John Lewis and Waitrose rose 18.7 per cent to a combined £379.8 million in the year to February, on sales of £6.8 billion, up 6.3 per cent. Sales at John Lewis Direct, the group’s internet arm, rose 45 per cent.

However, staff are unlikely to be overly concerned at the prospect of a downturn after being awarded their biggest profit-share bonus since 1998. More than 69,000 employees or “partners” across John Lewis and Waitrose will receive 20 per cent of their salary – an average of £2,600. Last year’s pay-out was 18 per cent. Mr Mayfield said: “We have no reason to feel less confident about our future. Our partners are feeling good, pumped up and motivated to do what they do brilliantly when customers come into our shops.”

He added that there needed to be a reality check about whether stores need to charge customers for plastic carrier bags to help the environment. Mr Mayfield said: “Of all the waste that goes to landfill, 20 per cent is household waste and 0.3 per cent is plastic bags. We need to focus on the more important areas.”

Times Recommends

• Gazprom brands Ukraine 'a barbarian' in gas row
• Services sector raises fears over UK jobless
• Retailers surge as profits survive sales plunge