John Lewis profits fade at it matches rivals' markdowns, invests for growth

By

Sandra Halliday

Published
Sep 13, 2018

Times must be tough if a business as strong as John Lewis Partnership can see its profits all but eradicated by a mixture of rising costs, intense competition and other factors. However, at least fashion was a strong performer, helping to justify the company's recent investment in the giant launch of its latest own-brand.

On Thursday the company, which owns the John Lewis & Partners chain as well as Waitrose & Partners supermarkets, reported pre-tax/pre-exceptionals profit down as much as 99% at just £1.2 million in the half year up to July 28. That was despite revenue rising 1.5% to reach £4.856 billion.
 
And the company even said it would be difficult to issue a forecast around its financial performance for the rest of this fiscal year due to an uncertain economy and Brexit. All it can say is that profits should be “substantially lower” than last year. Ouch.

MARKDOWNS

So what exactly is going wrong? Chairman Sir Charlie Mayfield, had some answers. He said that profit figure is always “lower and more volatile in the first half than the second half,” but it's been especially so this year.

That's largely because of the John Lewis department store chain where the 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.”

Essentially that means that with rival chains such as House of Fraser and Debenhams cutting prices amid their own quest to boost footfall and shift stock, John Lewis has been forced to respond and its ability to sell goods at full price has been hurt. The company said that it has seen an "unprecedented" level of price matching.

And the decision “not to pass on to our customers all cost price inflation from a weaker exchange rate,” hasn't helped either.

The struggles of its Home directory to return to sales growth have also had an impact and gross margin was also affected by a sales mix shift towards electronics rather than big ticket items in Home, the chairman said. 

In addition, the department store chain’s profits were dented by the costs of new shops and higher IT costs as it continued to invest for future growth, and from lower property profits compared to last year.

So, as mentioned, “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,” Mayfield said.

The company expects profit growth in Waitrose will be “offset by the continuing margin pressure” at John Lewis 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 as we approach the final quarter,” was one of the few upbeat statements in the earnings report.

FASHION OUTPERFORMS

Not that the recently renamed John Lewis & Partners operation has exactly struggled to get customers through its doors. It has grown sales, and it has also seen higher customer numbers and market share, and “substantially increased our overall customer experience ratings as measured by our Net Promoter Score,” the company said.

Fashion sales were up 1.2% and it outperformed the market, growing market share “strongly” in womenswear, with sales up 4.1%, and a particularly strong performance in own-brand, with sales up 12.3%. 

It also outperformed the market in Electricals and Home Technology (EHT), but the Home market continues to be challenging with sales down 4.2% impacted by a fall in demand for big ticket and bespoke items.