Smith's attributed the fall to fewer customers on the high street as customers rein back spending because of fear of recession. Richard Handover, Smith's chief executive, said: "What we are seeing is people being very cautious. Many got burned in the last recession and so they are being careful. But the danger is that we could end up talking ourselves into recession." Smith's comments follow similarly gloomy forecasts by Marks & Spencer and Boots lasts week.
Smith's said sales of books had stabilised after a period of losing market share. Newspaper and magazines sales had been marginally affected by comparisons with last year, when periodical sales were inflated following the death of Diana, Princess of Wales.
Smith's is closing 30 stores as a result of its acquisition of the John Menzies retail business in May. However, some of these stores will be poorly located branches of Smith's.
The company confirmed that it is looking at creating superstores from its existing portfolio by utilising extra space in some of its larger stores. This will help the group battle against the invasion by US superstore giants such as Borders as well as Waterstone's, its former subsidiary. However, Mr Handover said there were no plans to open new shops in a superstore format.
Smith's has reported three-month figures due to a change to its financial year-end. Profits in the three months to August were pounds 2m compared to pounds 3m last year.
The summer months are traditionally a quiet time for Smith's, accounting for just 20 per cent of annual group sales.
The shares closed 10p lower at 506.5p.