John Lewis, the biggest department store group in Britain, expects trading conditions to improve as the year progresses and summer events get shoppers spending again.

Although trading conditions remain subdued right now I do think that as the year goes on we'll see the trajectory shifting from decline into modest growth, Chairman Charlie Mayfield told reporters on Wednesday after reporting a drop in profits.

He was cautiously optimistic about the outlook, believing that the Queen's Diamond Jubilee celebrations and the London 2012 Olympic and Paralympic Games would help stimulate trade.

And Mayfield was confident that John Lewis, which trades from 29 department stores, six John Lewis at home stores, 274 Waitrose supermarkets and online businesses, would continue to grow faster than the overall market.

He expected the group to create 1,900 new jobs in 2012, having created 4,400 in 2011.

The chairman was speaking after the 148-year-old employee-owned firm, whose stakeholder business model has been lauded by Prime Minister David Cameron, cut its annual staff bonus for the first time in three years after posting a 3.8 percent fall in profits, showing even its affluent customer base has not been immune to the hard times.

Many British retailers are struggling as consumers grapple with inflation, muted wage growth, government austerity measures, worries about job security, a stagnant housing market and the impact of the euro zone debt crisis. The lack of consumption has been one of the main drags on economic growth.

While an industry survey this week said retail sales remained sluggish in February, latest official data showed they rose in January. That data, a string of promising business surveys and stabilisation in the labour market have raised hopes of recovery in 2012.

NEVER KNOWINGLY UNDERSOLD

John Lewis said its 81,000 staff, known as partners, will be paid a bonus of 14 percent of salary, down from 18 percent last year.

The group's profit before tax and a staff bonus pool of 165 million pounds fell to 354 million pounds in the year to January 28 from 368 million pounds last year.

The fall largely reflected investment across its systems and supply chain and a 20.4 percent decrease in department store operating profit to 158 million pounds as its Never Knowingly Undersold policy meant more discounting in tough markets.

Operating profit at Waitrose fell 5.2 percent to 261 million pounds.

On the investment front, we believe John Lewis is right to take some short term profit pain in order to make long term gains, said Neil Saunders of retail research group Conlumino.

While other retailers have been cutting back on investing in stores and propositions, John Lewis has married a strong programme of new store openings with significant expenditure on existing stores.

The group, the only major retailer to publish weekly sales figures, said total revenue increased 6.4 percent to 8.73 billion pounds.

It has been outperforming the wider market as its more affluent customers have generally coped better than lower income groups in the economic downturn.

After five weeks of its new financial year group sales excluding VAT sales tax were 7.7 percent higher year-on-year, with like-for-like sales up 2.4 percent at the department stores and up 2.2 percent at Waitrose.

(Editing by Dan Lalor and Greg Mahlich)