* Net profit may fall 40%, vs analysts forecasts of -17%
* Strategic initiatives to impact total costs
* Q3 sales so far tracking Q2 trends
MELBOURNE, March 21 (Reuters) - David Jones, Australia's No.2 department store chain, warned its full-year earnings could fall as much as 40 percent as it invests in a costly overhaul of its strategy as sales languish.
First-half earnings fell 19.6 percent, at the high end of company guidance for a drop of 15-20 percent, while the gross profit margin shrank by 180 basis points, the retailer said on Wednesday. Same-store sales fell 6.1 percent in the half.
The first seven weeks of the third quarter had seen sales tracking broadly in line with the second quarter.
"The company has implemented a number of new operational and strategic initiatives which will impact total costs in the balance of full-year 2012. These together with the expected continuing challenging trading conditions and the cost of clearing excess inventory are expected to result in a decline in 2012 PAT (profit after tax) of 35-40 percent," David Jones said.
Analysts had forecast a fall of around 17 percent for 2012.
After 2012, provided there was no further deterioration in trading conditions and relatively flat same-store sales, moderate growth was expected in earnings until there was sustained improvement in consumer sentiment and retail sales.
"While the transformation of the company will take time and initially involve major investment without immediate return, it will provide the company with a sustainable business model that can deliver medium - long term PAT (profit after tax) growth," David Jones said.
The non-mining sectors of Australia's economy are struggling under a strong currency, relatively high interest rates, falling home and share values and indebted consumers.
Australia's biggest department store chain, Myer Holdings , has said its annual net profit was likely to fall as much as 10 percent.
Myer gave a long list of headwinds, including higher day-to-day expenses for consumers, and worries about job security and the economy.
""We are at the discretionary end of retail and people will make their lounge (suite) last a bit longer, they will make their frock last a bit longer and perhaps not replace their suit as often," Myer Chief Executive Bernie Brookes told journalists last week.
Shares in David Jones last traded on Tuesday at A$2.73, down from over A$4.50 a year ago.
Before the announcement, analysts had forecast second half earnings around A$56 million, down 11 percent, and full-year profit of A$140.3 million, down 17 percent. (Reporting by Miranda Maxwell)