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“Challenging” home market and promotions wipe out profits at John Lewis

Published: 13 September 2018 - Fiona Garcia
 

Department store chain’s profits take a tumble, as home ranges struggle during the first half and margins are eaten away by the most promotional activity the business has seen in a decade.

Gross sales were flat in the first half, up just 0.8% to £2,093.4million, with the retailer citing a “challenging” home market as well as an increase in promotions and the cost of new stores and IT improvements as having had an impact on figures. Like-for-like sales across the department store business were down 1.2%, whilst profits were wiped out, plummeting from £33.3million last year to -£33.5million in H1 2018/19.

Fashion, as a category, saw strong sales and John Lewis & Partners said it outperformed the market in electricals and home technology, driven by a particularly strong performance in electricals, where sales were up 7.8%. However, the business recorded a 4.2% decline in home during H1, as it saw demand for big-ticket and bespoke ranges fall away.

Despite this, the business says its own-brand affordable home range, House, performed well during the trading period, with particularly strong sales since its relaunch in July.

Overall, the business said it has grown sales, customer numbers and market share, adding that it had “substantially increased” its overall customer experience ratings, as measured by its Net Promoter Score. “We have continued to invest in our customer proposition, both by strengthening our points of difference and by maintaining the level of service our customers expect from us, despite the adverse impact of low consumer confidence and price promotion in the market on our margin.”

Heavy discounting and John Lewis’ Never Knowingly Undersold pricing strategy has also had an impact on the bottom line. John Lewis Partnership chairman Sir Charlie Mayfield explained:” 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.”

Sister business, Waitrose fared better during the first half, with like-for-like sale sup 2.6% and profit up 7.2% to £94.4million. This helped offset declines from the department store business and saw parent firm John Lewis Partnership report a 1.6% uplift in gross sales and a profit of £6million – down 80.5% from the same trading period in the previous year.

My Mayfield added: “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 reducing.”

Investments during the first half included the replatforming of John Lewis’ website and money spent on improving its digital capabilities in order to keep ahead of competitors. John Lewis explained that 39% of its sales are made online and it expects this figure to continue to grow.

As well as trading via johnlewis.com, John Lewis & Partners operates 50 John Lewis & Partners shops across the UK, comprising 36 department stores, 12 John Lewis & Partners at home and shops at both St Pancras International station and Heathrow airport. 

Whilst confident in its strategy going forward, parent firm John Lewis Partnership remains aware of the challenges facing the retail market. It said “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.”

 

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