Isetan Mitsukoshi cuts outlook, warns of 2-yr slump

TOKYO Nov 13 (Reuters) - Isetan Mitsukoshi Holdings (3099.T), Japan's largest department store operator, cut its annual profit outlook and said it will slash prices as it braces for an economic slump it reckons could last two years.

The company, created in a merger of two rival stores in April, becomes the latest retailer to give a downbeat earnings outlook as the world's second-largest economy heads towards recession and consumers tighten their purse strings.

Isetan is also worried about new competition from Swedish fashion giant Hennes & Mauritz (HMb.ST), which entered the Japanese market in September with its first store in Tokyo's Ginza area, just a few blocks from a key Mitsukoshi outlet.

"We feel we have to manage the business under the assumption that this macro situation will continue for two years in the worst case scenario," Isetan Mitsukoshi President Kunio Ishizuka told a news conference.

The company lowered its operating profit forecast for the year through March to 25 billion yen from 34 billion yen, which had been in line with the average estimate of 13 analysts polled by Reuters Estimates.

The economic downturn has taken a big toll on sales of women's apparel, a damaging trend for Isetan because it counts on the high-margin segment for a large chunk of its profits.

Isetan acknowledged that H&M, which opened its second store in Tokyo's Harajuku this month, was cutting into its business and could prompt it to slash prices on some apparel items.

"As we see shoppers lining up at H&M stores, prices have an big impact on apparel," Ishizuka said. "We have to work with apparel makers and cut prices not by 20-30 percent but by 40-50 percent, while keeping quality."

The firm said it would aim to double its operating profit to 50 billion yen over the next three years by streamlining its operations and revamping its flagship stores, though it expects slow growth in revenue.

Japan's department store industry has been undergoing a consolidation as its overall sales fell 16 percent in the past decade, or nearly the entire sales of the top chain.

The third-largest Takashimaya Co Ltd (8233.T) announced last month that it had agreed with the regional chain H2O Retailing (8242.T) to work on a merger within three years, creating an entity rivaling Isetan Mitsukoshi in scale. (Reporting by Taiga Uranaka)