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John Lewis Partnership reports 98.8% decline in half-year profit

John Lewis Stratford 725 x 500

John Lewis Partnership has published unaudited condensed Interim Financial Statements for the half year ended 28 July 2018.  

Gross sales (2)

Profit before tax and
exceptional items (3)(4)

Total net debts (5)

£5,486.6m

(up 1.6%)

£1.2m

(down 98.8%)

£700m lower

vs July 2017

Revenue

Profit before tax (3)(4)

Net debt (6)

£4,856.7m

(up 1.5%)

£6.0m 

(down 80.5%)

 

£404m

(£17m lower vs July 2017)

Sir Charlie Mayfield, Chairman of the John Lewis Partnership, commented: 

“These are challenging times in retail. Our profits before exceptionals are in line with what we said they would be at our Strategy Update in June. We’re continuing to improve our offer for customers while ensuring we have the financial strength to continue developing our business going forward. This is reflected in both brands continuing to grow sales and customer numbers, and our total net debts(5) reducing.

Profits before exceptionals are always lower and more volatile in the first half than the second half. It is especially so this half year, driven mainly by John Lewis & Partners where gross margin has been squeezed in what has been the most promotional market we’ve seen in almost a decade. The pressure on gross margin has predominantly been from our commitment to maintain price competitiveness. This reflects our decision not to pass on to our customers all cost price inflation from a weaker exchange rate and from our Never Knowingly Undersold promise, where we have seen an unprecedented level of price matching as other retailers have discounted heavily. Gross margin was also affected by a sales mix shift towards electronics rather than big ticket items in Home. In addition, John Lewis & Partners profits were impacted by the costs of new shops and higher IT costs as we continued to invest for future growth, and from lower property profits compared to last year.

In Waitrose & Partners, profits were down on last year, but from Q1 to Q2 there has been marked improvement in like-for-like sales(6) as well as good progress in rebuilding gross margin, and we are on track for profit growth for the full year.

At Partnership level we have also borne additional costs, particularly as a result of greater investment in cyber security and data protection, which have impacted our overall profits. Despite the reduction in profits, our total net debts have reduced. Our accounting pension deficit has more than halved since January 2018 to £171.3m (net of deferred tax) and our estimated actuarial pension deficit of £89m represented a funding level of over 98%. Total net debts are £700m less than last year and we continue to maintain a strong liquidity position. This is all consistent with our plans to ensure a strong financial position in order to invest in our strategy of differentiation at a rate of £400m-£500m per year.

Our Partnership structure and our Partners are key differentiators for us in a highly competitive and changing retail market. The launch last week of John Lewis & Partners and Waitrose & Partners reflects our ambition for the future and the critical difference of our Partners.”

(1)  2017/18 comparatives have been restated (see pages 11 to 12 for further details)
(2)  Gross sales includes sale or return sales and VAT (see page 15 for further details)
(3)  Includes property profits of £nil (2017/18: £11.4m with £0.9m in Waitrose & Partners and £10.5m in John Lewis & Partners)
(4)  Exceptional income of £4.8m mainly includes £26.0m income from the release of the pay provision for National Minimum Wage compliance as the methodology for calculating the liability has been clarified following discussions with HMRC, offset by a £9.1m charge for restructuring and redundancy costs and a £12.6m branch impairment charge. 2017/18 exceptional charge of £65.4m mainly for restructuring and redundancy costs and branch impairments
(5) Total net debts represents the total borrowings of the Partnership including net debt adjusted for an estimate of non-liquid cash, the accounting pension deficit net of deferred tax, and the present value of future rentals payable under operating leases discounted at 5%
(6) For definitions see the glossary on pages 147-148 of our 2018 Annual Report and Accounts

Outlook 2018/19

With the level of uncertainty facing consumers and the economy, in part due to ongoing Brexit negotiations, forecasting is particularly difficult but we continue to expect full year profits to be substantially lower than last year for the Partnership as a whole. We expect profit growth in Waitrose & Partners will be offset by the continuing margin pressure in John Lewis & Partners and by incremental costs of investment. We are continuing with our plans for the future in this half and have great confidence in the attractiveness and potential of our offer across Waitrose & Partners and John Lewis & Partners as we approach the final quarter.

Strategy update

At our Strategy Update in June we set out our plans to grow through differentiation rather than scale, recognising and enhancing the role that Partners play in driving our difference and competitiveness, and to secure the financial strength to ensure we are able to maintain a rate of investment of £400m-£500m per year, which we see as crucial to our long-term success, despite near-term pressures on profitability.

Source : John Lewis Partnership

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13 September 2018

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