John Lewis Partnership has reported that profit before tax and exceptional items came in at just £1.2m, down £95m on the same period last year, despite gross sales rising 1.6% to almost £5.5bn.
John Lewis stores showed an underlying operating loss of £19.2m from profits of £54.4m a year earlier, while Waitrose & Partners' profits were 12% down at £96.4m by the same measure.
The partnership, which recently completed a rebranding exercise to include '& Partners' at its department stores and supermarkets to reflect its employee-owned business model, said discounting, cost-cutting and investment had taken its toll on profitability
Sir Charlie Mayfield (pictured), 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 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.'
Mayfield continued, '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.'
Mayfield noted, 'In Waitrose & Partners, profits were down on last year, but from Q1 to Q2 there has been marked improvement in like-for-like sales 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.'
Mayfield added, '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.'
Mayfield concluded, '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.”
With the level of uncertainty facing consumers and the economy, in part due to ongoing Brexit negotiations, forecasting is particularly difficult but the group continues to expect full year profits to be substantially lower than last year for the Partnership as a whole.
It expects profit growth in Waitrose & Partners will be offset by the continuing margin pressure in John Lewis & Partners and by incremental costs of investment.