John Lewis fashion ops take starring role, despite wider profits drop

By

Sandra Halliday

Published
Mar 7, 2019

The headline news at John Lewis Partnership on Thursday may have been a 45%+ plunge in its pre-tax profits, a 1%-only sales rise and a lower bonus for its staff. But dig a bit deeper and the big story for the fashion sector was that fashion saw “strong” growth with a “significant” market share rise and an almost-13% increase in own-brand womenswear.

It seems the department store chain that was once the go-to destination for the middle classes beautifying their homes is now the must-visit store for the middle classes looking for something to wear. That’s an impressive feat at a time when rivals House of Fraser and Debenhams have lurched from one crisis to another.

THE NUMBERS

So let’s look at the firm’s figures for the year to January 26. Gross sales for the whole company rose only 1% to £11.724m, revenue rose by the same percentage to £10.316bn and pre-tax, pre-exceptional items profit fell 45.4% to £160m. 

Chairman Sir Charlie Mayfield said: “In line with expectations set out in June, our Partnership profits before exceptionals have finished substantially lower in what has been a challenging year, particularly in non-food. Operating profit recovered strongly in Waitrose & Partners, up 18% (to £203.2m), mainly due to improved gross margins. However, it was down sharply, by 56% (to £114.7m), in John Lewis & Partners because of weaker Home [department] sales, gross margin pressure, higher IT costs, the property impact of new shops and lower profit on asset sales.”

But the company cut its debt load as it worked to build up its cash reserves “as a defence against uncertainty in the economy and to enable us to maintain annual investment at £400m-£500m per year.”

And he added that while Partnership profits were down, “there were several areas where we have seen performance move forward, particularly in areas where we have invested. In John Lewis & Partners the launch of our own-brand Womenswear and expansion of personal styling offer has driven strong sales growth in Fashion, growing market share significantly.”

The company has awarded its staff (who own the firm and are known as Partners) a 3% bonus, which is low, but which boosts the firm’s cash-conserving/investment-for-growth plans.

CHALLENGES

The Waitrose supermarket chain was generally stronger than the John Lewis department stores/webstore operation during the year, so what actually went wrong at the once-buoyant John Lewis chain?

The company said it saw “near constant discounting across many categories from October onwards in response to the combination of subdued demand, excess retail space and some other retailers’ distress.”

As a result, the chain saw a significant operating profit decline, as mentioned earlier. Gross sales at John Lewis & Partners were up only 0.7% to £4.889bn, with revenue up 0.7% to £3.887bn and down 1.4% on a like-for-like basis. Weaker Home sales were the biggest problem and combined with gross margin pressures to drive around half of the reduction in profits, with the remainder largely due to additional IT costs and property-related items.

The company also said that “near-term uncertainty, politically and in the economy, is having a major impact on consumer confidence, but we do not believe the market conditions are cyclical. The disruption we have seen on the high street, including business failures and renewed interest in mergers and acquisitions, are instead signs of an inevitable market adjustment which will require greater clarity on whether brands are competing on scale or difference.”

The company seems to think it’s on the right track on this front, investing in its brands, people and stores and it said that at the John Lewis chain, its strongest sales growth came in “areas where we have made the greatest investments in new product and services.”

Its full range relaunch of own-brand Womenswear, including new product, in-store concept and enhanced training, “delivered sales growth of 12.9%,” it said. 

THE FUTURE 

In the year ahead, its product update focus will see its furniture assortment and Menswear collections being completely relaunched.

So while the company seems to expect on-going tough times, it also seems well prepared for them. It said it has been preparing for the operational implications of Brexit for well over a year, and is “in a good position for a managed transition,” with measures to deal with currency, tariffs, customs and labour issues. 

But it’s not being over-confident and aded that the main risk to its business “in an unmanaged transition” is a strong fall in consumer confidence and the impact that has on trade.

Given the current level of uncertainty, John Lewis expects 2019 trading conditions “to remain challenging. We have built up a strong liquidity position at nearly £1.5bn so that we have the financial headroom to mitigate the risks and make sure we can continue investing for the future,” it added.