London, 2016-Sep-18 — /EPR Retail News/ — Unaudited condensed Interim Financial Statements for the half year ended 30 July 2016 Strict Stock Exchange Embargo, 7.00am.
Taking charge of our future
|Operating profit before exceptional items(3)||121.3||(10.5)%||32.4||(31.2)%||138.7||(4.3)%|
|PBT before exceptional items(3)||81.9||(14.7)%|
(1) Gross sales includes sale or return sales and VAT
(2) Waitrose like-for-like sales excludes petrol
(3) Includes property profits of £0.5m in Waitrose (2014/15: £nil)
(4) Kantar 12 week Grocery data for Waitrose / BRC for John Lewis
Sir Charlie Mayfield, Chairman of John Lewis Partnership, commented:‘We have grown gross sales and market share across both Waitrose and John Lewis, but our profits are down. This reflects market conditions and, in particular, steps we are taking to adapt the Partnership for the future. These are not as a consequence of the EU referendum result, which has had little quantifiable impact on sales so far. Instead there are far reaching changes taking place in society, in retail and in the workplace that have much greater implications.
Our ownership structure makes it especially important that we manage the Partnership carefully and thoughtfully for the long term and our plans anticipate the impact of these bigger changes. Evidence of that is already showing within these results and will become increasingly evident as we implement our long-term strategy.’
- Solid gross sales growth of 3.1% with increased market shares (4) and rising customer numbers in challenging markets
- PBT before exceptional items down 14.7% to £81.9m as we respond to the deep structural changes in the retail market. Our commitment to competitive pricing, excellent service, maintaining pay differentials and investing for the long term have held back profits. We expect these pressures to continue through this year and next
- Exceptional charge of £25.0m for the write-down of property assets no longer intended to be developed and related costs, following a strategic review (2015/16: income of £128.0m following the sale of the Clearings building)
- Net debt of £549.3m, £115.3m (17.3%) lower than 1 August 2015 and consistent with our strategy of strengthening our balance sheet. Increase in net debt since January 2016 of £176.8m (47.5%)
- Accounting pension deficit of £1,453.7m, £512.1m (54.4%) higher than January 2016, reflecting a significant decrease in the real discount rate used to value the liabilities due to historically low bond yields. Net of deferred tax, the deficit was £1,209.1m
In the first half of the year, the Partnership’s gross sales grew 3.1% to £5.27bn. Waitrose gross sales grew 2.2% and John Lewis gross sales by 4.5%, with both brands growing market share and customer numbers. PBT before exceptionals was down by 14.7% with lower operating profits in Waitrose and John Lewis and higher financing costs for our long leave scheme, partly offset by reduced pension operating costs.
Our first half profits are always lower and often more volatile than in the second half which typically accounts for at least two-thirds of our annual profits. We have also decided to prioritize a number of key areas of investment including in IT, our distribution network and in pay, as well as making a shift towards our existing stores in Waitrose which has resulted in exceptional property asset write-downs. These decisions form part of our strategy to get ahead of the significant changes that are affecting the wider retail market and we are confident they will position us well for the future.
Our focus further into the future is reflected in every aspect of the Partnership’s strategy, which was launched internally last year and described in detail in our Annual Report. It has three main themes.
The first is to strengthen our financial position, both to increase the resilience of our balance sheet to market shocks and to build our financial firepower to invest in new growth in the future. In the last six months we have taken a number of steps in this direction. In April 2016 we implemented changes to our pension benefit, agreed in 2015, which will reduce the Partnership’s future risk exposure. We will also reduce capital expenditure to approximately £460m this year, 7% lower than last year, as part of our planned reduction in net debt, which has improved by 17% since last year. We also continue to make progress with the priority we have placed on improving productivity.
Secondly, we have anticipated the significant changes in how customers are choosing to shop and we are renewing our focus on strengthening the appeal of our two well-loved brands. This includes continuing with a greater proportion of investment in IT and our supply chain – both are critical to improving service and convenience. We are also increasing our focus on innovation. Examples this half include the launch of the Waitrose 1 premium range and a new own-brand luxury womenswear label, Modern Rarity, in John Lewis. We are also developing a series of initiatives to explore new growth opportunities and will make further announcements on these in due course.
Thirdly, we are committed to creating better jobs, for better performing Partners, on better pay. We intend to ensure Partners’ pay remains well above the National Living Wage on average, and in this year’s pay review in March, rates increased by 5.1% on average for our lowest paid Partners. Additional annualised pay costs for our lowest paid Partners will be £33m greater as a result, whereas had we simply complied with the National Living Wage, costs would have been only £3m higher than last year. However, higher pay depends on better productivity and greater contribution and we anticipate that this will mean we will have fewer Partners over time as compared to today. We are developing comprehensive plans to enhance job design, progression pathways and development support.
For the first six weeks of the second half, Partnership gross sales are up 3.8%. Waitrose gross sales have increased by 5.0% (1.4% like-for-like, excluding petrol) and John Lewis gross sales are 2.0% higher than last year (0.7% like-for-like). While we expect to trade well compared to the market, the structural changes in retail will not ease.
Our PBT before exceptional items is down 14.7% in the first half as we respond to the changes in the retail market. Our commitment to competitive pricing, excellent service, increasing pay and investing for the long term have held back profits. We expect the trading pressures to continue through this year and next. The EU referendum result has had little quantifiable impact on sales in the first half, but the uncertainty of leaving the EU will remain and the full impact of this change is yet to become clear.
In the first six months of the year, the Partnership delivered solid gross sales growth with both Waitrose and John Lewis increasing their market shares and customer numbers. Partnership gross sales (inc VAT) were £5.27bn, an increase of £157.7m, or 3.1%, on last year. Revenue, which is adjusted for sale or return sales and excludes VAT, was £4.67bn, up by £124.2m or 2.7%.
Partnership operating profit was £113.7m, down £159.2m, or 58.3% on last year. This includes an exceptional charge of £25.0m in Waitrose for the write-down of property assets no longer intended to be developed and related costs, following a strategic review re-prioritising future investment spend towards existing stores (2015/16: income of £128.0m following the sale of the Clearings building). Excluding the exceptional items, operating profit was £138.7m, down £6.2m or 4.3% on last year.
Profit before tax was £56.9m, down by £167.1m, or 74.6% on last year. Excluding the exceptional items it was £81.9m, down by £14.1m or 14.7%.
In a market that remains challenging, we grew gross sales, market share and customer numbers. Gross sales increased by 2.2% to £3.25bn, while like-for-like sales decreased by 1.0%. Online grocery sales grew by 4.3%. Our share of the market(5)was up to 5.2% and we had, on average, 250,000 more customer transactions a week compared to last year.
Operating profit before exceptional items was down 10.5% to £121.3m, impacted not only by the market conditions but also increases in pay to maintain differentials, investment in IT and higher supply chain costs following the transition to our new National Distribution Centre operation.
Including the exceptional item of £25.0m for the write-down of property assets that we now no longer intend to develop and related costs, operating profit was down 28.9% to £96.3m.
We opened seven new branches in the first half of the year, five core supermarkets and two convenience branches, and we closed one convenience branch. In the second half and beyond our Modern Waitrose strategy continues as we plan to increase both the depth and pace of investment in our existing stores. This will enable us to get the best value from our estate and to put even greater focus on what sets Waitrose apart: high quality and high service. As we shift the focus of our investment towards our existing branches the rate of new space growth will slow.
Hospitality sales grew by 7.1% and we now have 121 cafes, 81 bakery grazing areas, seven wine bars and nine juice bars in our branches. As customers’ shopping and eating patterns change hospitality will play a big part in our branch programme; our next step will be to trial new concepts in our shops at Barbican, Chandlers Ford and Twyford during the second half.
We will continue to innovate with high quality, high provenance products. A highlight of the first half of this year was the launch of the Waitrose 1 premium range which underlines our leadership in this area and brings together in one brand the very best of Waitrose. The sales uplift in products in this range has been encouraging, up 19.4% on last year.
We now have 6.4 million myWaitrose cardholders, an increase of 7.5% in the last six months, with customers continuing to respond positively to the range of offers and rewards.
Overseas, we already export Waitrose products to 58 countries. A new export deal with Alibaba Group has given us the opportunity to export to China for the first time; and a partnership with online retailer, British Corner Shop, means that people in more than 100 countries are now able to buy over 2,000 Waitrose product lines.
(5) Kantar 12 week Grocery data
In a retail industry under pressure in the face of transformational change, John Lewis has continued to outperform, delivering solid gross sales of £2.02bn, up 4.5%, with strong like-for-like sales growth of 3.1% as we prepare for the critical sales and profit driving second half.
Despite growing sales, operating profit fell by 31.2% to £32.4m, with more than half of this decline due to transitioning costs in our distribution network as we temporarily maintain legacy sites to smooth the transition to Magna Park, and increases in pay to maintain differentials. The balance of the reduction reflects the continued shift to online and a market dynamic of competitive pricing, both of which we expect to continue into the second half.
Against this backdrop we remain committed to delivering our strategy and the first half saw record capital investment in the essentials of omnichannel trading as we go into our most important peak trading period.
The role of fulfilment is underscored by the state-of-the-art, industry-leading campus at Magna Park we will open in September, part of a £150 million investment which will streamline our network to become more productive and deliver better service to our customers.
Across our product areas, we increased gross sales and market share and invested in our in-house design capability to build our unique combination of own-brand collections and the best brands on the high street.
- EHT was up 8.4%, driven by our computing and tablet category, up 8.7%, mobile phones and our industry-first Smart Home concept in Oxford Street.
- Fashion performed well in a declining market with sales up 2.8%, with womenswear up 4.0% and menswear up 4.9%, boosted by our collaboration with vlogger Jim Chapman. Beauty was up 4.0%, and we are investing in refurbishments of our beauty halls. We were the first high street outlet to sell online brands Finery and Selfish Mother.
- Sales in Home were up 3.7%, as we continue to build towards a £1bn own brand business in the category. Sales were driven by furniture, up 6.8%, with beds up 13.7%. Outdoor living had a record half, up 14.0%. Our roll-out of West Elm continued and is now in 7 shops.
Our strategy for shops continues to be anchored in convenience and experience – giving our customers a reason to visit shops and inspiring them when they are there. While sales through this channel were down 1.0%, 65.5% of our merchandise sales come from branches and three-quarters of our customers buy in shops.
This year we will open in two new locations; in Leeds, our most services and experience led branch to date, and in Chelmsford, our first shop in Essex. Both will feature new concepts as well as our full in-store service offer across interior design, personal styling and technical advice.
Online sales represented 34.5% of total merchandise sales, up from 30.6% last year. Because our customers continue to value the convenience of digital and mobile shopping to complete their purchases, we have fully integrated our desktop, mobile and app, and have introduced services such as the Personal Style Edit and ‘Find Similar’.
Overseas we are continuing to roll out our wholesale model with shop-in-shops in Australia and Ireland opening next year, taking our total international locations to 29, and we have increased the number of countries where johnlewis.com delivers to 40.
Despite unpredictable customer sentiment and long-term structural challenges faced by the retail industry, we are confident that our ongoing investments and our omnichannel strategy will position us to outperform the market in the critical second half where the majority of our sales and profit are delivered.
Partnership Services Group
Partnership Services and Group includes the operating costs for our Group offices and shared services, the costs for pan-Partnership initiatives and transformation programmes, and certain pension operating costs. Partnership Services and Group net operating costs increased by £3.2m or 19.6%, principally reflecting additional costs supporting initiatives to either drive sales growth through new business opportunities or to reduce costs through increased productivity. However, overall costs decreased by £22.7m to £15.0m, due to the decrease in pension operating costs.
Investment in the future
Capital investment in the first half of the year was £200.5m, a decrease of £37.4m (15.7%) on the previous year. Investment in Waitrose was £76.1m, down £38.7m (33.7%) on the previous year, and in John Lewis investment was £115.7m, up £6.5m (6.0%).
We have continued to focus our investment in IT and distribution, which now represents 55% of our total capital investment, up from 48% last year. In addition, we have decided to prioritize future investment in Waitrose in our existing shops ahead of new space.
The pension operating cost was £96.4m, a decrease of £26.0m or 21.2% on the prior year costs, reflecting the impact of our move to a hybrid pension scheme combining defined benefit and defined contribution pensions from April 2016, as well as an increase in the real discount rate used to determine the cost to 0.70% at the beginning of the year from 0.35% at the beginning of the previous year. Pension finance costs were £14.8m, a decrease of £3.7m or 20.0% on the prior year, reflecting a reduction due to a lower accounting pension deficit at the beginning of the year than at the beginning of the previous year. As a result, total pension costs were £111.2m, a decrease of £29.7m or 21.1% on the prior year.
In February 2016, given the Partnership’s strong liquidity position, we made a cash contribution of £137.0m to the pension scheme to prepay approximately 10 months of contributions. As a result, in the first half of the year, total cash contributions to the pension scheme totalled £139.3m, an increase of £56.5m or 68.2%. We are currently undertaking a triennial actuarial valuation as at 31 March 2016, our first since the changes to our pension benefit, which will determine our ongoing contribution rate. The valuation should conclude by December 2016.
The total accounting pension deficit at 30 July 2016 was £1,453.7m, an increase of £512.1m (54.4%) since 30 January 2016. Net of deferred tax, the deficit was £1,209.1m. Pension fund assets increased by £551.9m (13.1%) to £4,750.3m. However, the accounting valuation of pension fund liabilities increased by £1,064.0m (20.7%) to £6,204.0m, mainly reflecting a decrease in the real discount rate used to value the liabilities to -0.25% at July 2016 compared to 0.70% at January 2016, due to historically low bond yields. If this market driven rate persists at these levels to the end of January 2017, it will result in a significant increase in our pension operating costs for the next financial year, the year ending 27 January 2018.
Our deficit has increased by £512.1m over the last 6 months, driven by the steep reduction in interest rates. We are unusual in having an open defined benefit scheme, which means that it is a long term liability – our average duration is around 20 years – and that allows us to target higher returns than the average pension fund. We agree cash funding with the Trustee based on that long term funding commitment. Our open defined benefit pension scheme is an important part of the total reward that Partners receive, and as a co-owned business we have more flexibility in the balance between pay, pension and distribution of profits than many other organisations.
At 30 July 2016, net debt was £549.3m, £115.3m (17.3%) lower than 1 August 2015, reflecting our focus on cash generation and the reduction in capital investment. Net debt is £176.8m (47.5%) higher than January 2016.
Net finance costs on borrowings and investments decreased by £1.9m (6.1%) to £29.2m, mainly reflecting reduced finance costs following the repayment of the Partnership Bond in April 2016. After including the financing elements of pensions and long service leave and non-cash fair value adjustments, net finance costs increased by £7.9m (16.2%) to £56.8m, impacted by higher long leave financing costs arising from volatility in market driven assumptions.
We continue to embed sustainability in our business, understanding that being a responsible business has wide-reaching implications and underpins our long-term success. This year, Waitrose became the first retailer to announce a deadline to switch all branded canned tuna to more sustainable fishing methods. Recognising the threat from plastics to marine ecosystems, Waitrose is phasing out microbeads from all cosmetics, and cotton bud stems will soon be replaced with biodegradable paper. John Lewis is providing training to suppliers in the requirements of the Modern Slavery Act and has launched a supply chain mapping-tool in order to help suppliers identify sustainable sources of wood and paper.
Notes to editors
The John Lewis Partnership – operates 46 John Lewis shops across the UK, johnlewis.com, 349 Waitrose shops,waitrose.com and business to business contracts in the UK and abroad. The business has annual gross sales of over £11bn. It is the UK’s largest example of an employee-owned business where all 88,900 staff are Partners in the business.
Waitrose – winner of the Best Supermarket1 and Best Food Retailer2 awards- currently has 349 shops in England, Scotland, Wales and the Channel Islands, including 60 convenience branches, and another 27 shops at Welcome Break locations. It combines the convenience of a supermarket with the expertise and service of a specialist shop – dedicated to offering quality food that has been responsibly sourced, combined with high standards of customer service. Waitrose also exports its products to 58 countries worldwide and has eight shops which operate under licence in the Middle East. Waitrose’s omnichannel business includes the online grocery service Waitrose.com, as well as specialist online shops including waitrosecellar.com for wine and waitrosekitchen.com for cookware, utensils and kithchen gadgets.
¹ Which? Customer Survey
² Verdict Customer Satisfaction Awards
John Lewis – John Lewis operates 46 John Lewis shops across the UK (32 department stores, 12 John Lewis at home and shops at St Pancras International and Heathrow Terminal 2) as well as johnlewis.com. John Lewis ‘Best In-Store Experience 2016’, ‘Best Clothing Retailer 2016,’ ‘Best Electricals Retailer 2016,’ ‘Best Furniture Retailer 2016,’ ‘Best Homewares Retailer 2016’ and ‘Best Click & Collect Retailer 2016’1, typically stocks more than 350,000 separate lines in its department stores across fashion, home and technology. Johnlewis.com stocks over 280.000 products and is consistently ranked one of the top online shopping destinations in the UK. John Lewis Insurance offers a range of comprehensive insurance products – home, car, wedding and event, travel and pet insurance and life cover – delivering the values of expertise, trust and customer service expected from the John Lewis brand.
1Verdict Consumer Satisfaction Awards 2016
For further information please contact:
Citigate Dewe Rogerson
Simon Rigby / Jos Bieneman
Telephone: 020 7638 9571
John Lewis Partnership
Director of Communications
Mobile: 07710 398460
Group Senior External Communications Manager
Mobile: 07764 675608
Mobile: 07764 697674
Head of External Communications
Mobile: 07919 057931
Mobile: 07764 676414
Head of Communications
Mobile: 07703 379561
Group Head of Treasury
Mobile: 07525 582955
Assistant Group Treasurer
Mobile: 07834 770684
Source: John Lewis