Sir Charlie Mayfield, 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⁽⁵⁾ 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. 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.

In Waitrose & Partners, profits were down on last year, but from Q1 to Q2 there has been marked improvement in like-for-like sales⁽⁶⁾ 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. 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.

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.”

(1)  2017/18 comparatives have been restated (see pages 11 to 12 for further details)
(2)  Gross sales includes sale or return sales and VAT (see page 15 for further details)
(3)  Includes property profits of £nil (2017/18: £11.4m with £0.9m in Waitrose & Partners and £10.5m in John Lewis & Partners)
(4)  Exceptional income of £4.8m mainly includes £26.0m income from the release of the pay provision for National Minimum Wage compliance as the methodology for calculating the liability has been clarified following discussions with HMRC, offset by a £9.1m charge for restructuring and redundancy costs and a £12.6m branch impairment charge. 2017/18 exceptional charge of £65.4m mainly for restructuring and redundancy costs and branch impairments
(5) Total net debts represents the total borrowings of the Partnership including net debt adjusted for an estimate of non-liquid cash, the accounting pension deficit net of deferred tax, and the present value of future rentals payable under operating leases discounted at 5%
(6) For definitions see the glossary on pages 147-148 of our 2018 Annual Report and Accounts

Outlook 2018/19

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.

Strategy update

At our Strategy Update in June we set out our plans to grow through differentiation rather than scale, recognising and enhancing the role that Partners play in driving our difference and competitiveness, and to secure the financial strength to ensure we are able to maintain a rate of investment of £400m-£500m per year, which we see as crucial to our long-term success, despite near-term pressures on profitability.

Growth through differentiation

Waitrose & Partners

At our Strategy Update we set out our key differentiation priorities: product innovation, range tailoring, health and wellbeing, doing the right thing and service.

·   Product innovation and range tailoring

• Increased own brand and exclusive products, developing 1,781 products, including 91 vegan and vegetarian lines. New ranges include revamped Cooks’ Ingredients which launched yesterday, featuring innovative items such as black limes, zhoug and kimchi paste.
• Boosted product development with our new Food Innovation Studio which opened at our Bracknell head office last month, doubling the number of chefs with more than twice the space of previous facilities. The Studio will in future offer Partner learning opportunities, helping to fulfil our vision of every Partner becoming a Food Ambassador.
• Completed two successful range reviews in the areas of sliced bread and cheese, and plan to carry out an average of four range reviews each month between now and year end.

·   Service

• Continued to add to the Partner service we offer our customers and we now have trained 95 Healthy Eating Specialists and 800 Baristas.
• Increased online grocery sales, up 23%, with profit growing and a significant year-on-year increase in customer experience ratings from our Net Promoter Score of our most loyal customers.

·    Health and wellbeing

• Developed our health and wellbeing offer in products and services with our Good Health marque added to more than 1,600 lines. Our 17 shop health checks trial with BUPA has also just concluded and we are currently evaluating the results.

·    Doing the right thing

• Removed disposable cups from the free tea and coffee offer to myWaitrose members, so avoiding the use of more than 52 million takeaway cups a year. By the end of 2018 we will not be using black packaging for our meat, fish, fruit and vegetables, a big step towards removing it from all own-label packaging by 2019. This progresses our commitment for all our packaging to be widely recyclable, reusable or home compostable by 2025.

John Lewis & Partners

In the first half John Lewis & Partners has grown sales, customer numbers and market share⁽⁷⁾, and substantially increased our overall customer experience ratings as measured by our Net Promoter Score.

Fashion sales were up 1.2% and we 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%. We outperformed the market in Electricals and Home Technology (EHT), driven by particularly strong performance in Electricals where sales were up 7.8%. The Home market continues to be challenging with sales down 4.2% impacted by a fall in demand for big ticket and bespoke items.

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.

·     Unique and desirable products:

• Recently launched John Lewis & Partners Womenswear, our largest own brand collection to date, a significant step forward in our plan to build a £500m own-brand fashion business.
• Offered customers more brands as the exclusive High Street partner, including Madewell, J Crew, Stuart Weitzman in Fashion and Footwear and Proenza Schouler in Beauty.
• House, our trend-led, affordable home range, performed well with particularly strong sales since its relaunch in July.

·      Exceptional service:

• Successfully trialled a number of concepts at our Westfield White City shop, including an Experience Desk and a new range of Personal Styling appointments tailored to the occasions customers are shopping for. These will be rolled out to a further 15 shops by the end of the second half.
• Completed the replatforming of our website and continued the investment in our digital capabilities that sets us apart from our competitors. With 39% of our sales made online, these improvements will help customers shop with us more easily and includes upgraded search functionality, a smoother checkout process and the ability for customers to see product availability in our shops across our digital platforms.
• Completed the roll out of two-hour delivery windows which improved communications with customers and contributed to record levels of customer satisfaction. Live online delivery tracking has also proved popular, resulting in 1.5 million additional visits to our website.

(7) BRC market

Partners at the heart

The inherent strength of the John Lewis Partnership is our Partners, who are at the heart of our customer proposition, and how we can unlock Partner potential. We have been:

·        Strengthening pay for performance and structuring Partner pay ranges in line with newly-designed jobs. Our average hourly rate of base pay for non-management Partners is now £9.17.

·        Developing our apprenticeships programme with around 500 apprentices enrolled in our retail, LGV driving, vehicle maintenance and hospitality schemes. A further 300 apprentices are expected to join in the next six months across existing and new programmes being rolled out across our head offices and shops, in areas such as human resources, taxation, project management, procurement, leadership, farming, digital and sewing machinists.

At this time of disruption in the sector, it has never been more important to invest in the wellbeing and resilience of Partners, who are at the heart of our business success. To this end, the Partnership has set itself a bold ambition to become Britain's Healthiest Workplace by 2025, which goes back to our founding principles, as well as being a fundamental condition of unlocking the potential of our Partners. We have already taken a number of important steps.

We have launched a Wellbeing Champions Network with more than 150 Partners recruited in more than 60 locations across the country. This will encourage and empower Partners to look after their health and wellbeing, provide information on available support and resources, and create a positive movement for change. In support of this we are launching innovative preventative tools for Partners. One example is Unmind, a health platform and app which already has more than 3,500 users. We are also re-igniting our community spirit by reviewing what we do in our dining rooms and how we use this space for social interaction as well as healthy food.

Profit and sustained investment

As we anticipated and highlighted in our Strategy Update in June, our Profit before tax and exceptional items was £1.2m, down £95.0m or 98.8% on last half year. After including exceptional income of £4.8m (2017/18: exceptional charge of £65.4m), our Profit before tax was £6.0m, down £24.8m or 80.5% on last half year.

We plan to maintain investment at the rate of £400m-£500m per year and capital investment forms a major part of that. Operating capital investment, which excludes the acquisition of freeholds of our trading branches, was £142.4m, a slight decrease of £6.7m or 4.5% on last half year.

We remain focused on and committed to the long-term financial sustainability of the Partnership, building our return on capital in order to share the rewards of this with Partners on the platform of a strong and flexible balance sheet. We measure this through our three annual Key Performance Indicators (KPIs)⁽⁸⁾: Return on Invested Capital (ROIC), Debt Ratio and Profit per average FTE⁽⁹⁾ Partner.

·        Our financial priority remains to reduce our Debt Ratio to around three times cash flow within around five years. This is one of the reasons that has led us to hold back Partnership Bonus in recent years, but as a result we are in a much stronger position to weather the pressures currently affecting UK retail. In addition, a pension review is currently progressing with any changes to our future pension benefit expected to be agreed in 2019.

·        We expect profit this year to be substantially lower than in 2017/18, and this will be reflected in ROIC and Profit per average FTE Partner performance. Lower profits will also impact our Debt Ratio, but we remain focused on further reducing our total net debts. Our Debt Ratio will also be impacted by the accounting pension deficit at January 2019, which will be determined using market interest rates at that time. The reduction in the accounting pension deficit at July 2018 has been mainly due to an improvement in the real discount rate used to value the liabilities and an increase in pension fund assets.

·        The actions we are taking are aimed at restoring ROIC and Profit per average FTE Partner to levels that will support increased investment and improved Bonus levels over the medium term, while maintaining a robust balance sheet position. This will take a lot of hard work from all of our Partners, but we are confident in our commitment, drive and ability to deliver the Partnership’s strategy.

(8) For definitions of KPIs see page 30 of our 2018 Annual Report and Accounts
(9) Full-time equivalent

Additional Financial Information

(10) Waitrose & Partners like-for-like sales excludes fuel
(11) Not meaningful

Net finance costs

Net finance costs decreased by £10.5m reflecting (i) the capitalisation of borrowing costs for qualifying assets which relate to a number of our significant multi-year capital projects, (ii) lower pension finance costs due to a lower accounting pension deficit and nominal discount rate used to determine the finance cost at the beginning of the year compared to the beginning of the previous year, as well as early payment of cash contributions, and (iii) lower long leave finance costs arising from volatility in market driven assumptions.

Exceptional items

Exceptional income totalled £4.8m (2017/18: charge of £65.4m) with £2.0m charge in Waitrose & Partners (2017/18: £21.7m), £14.2m charge in John Lewis & Partners (2017/18: £21.1m) and £21.0m income in Group (2017/18: charge of £22.6m). Further detail is included in the following table:

a)  Charge of £9.1m for restructuring and redundancy costs, principally in relation to our branch, retail and head office operations. In 2017/18, the restructuring and redundancy charge of £55.5m was principally in relation to branch, distribution and retail operations as well as functional restructurings in Finance, Personnel and IT, as we moved from divisional to Partnership functions.

b)  Charge of £12.6m for branch impairment in John Lewis & Partners following the signing of a lease contract. In 2017/18 there was a charge of £9.0m for branch impairments in Waitrose & Partners, which was previously reflected as non-exceptional operating expenses and has subsequently been reclassified to exceptional items (see page 12 for further details).

c)  In 2016/17, a £36.0m provision was recorded as an exceptional charge to cover the potential costs of complying with the National Minimum Wage Regulations. Discussions with HMRC are now advanced and the methodology for calculating the liability has been clarified, resulting in a £26.0m release of the provision in this half year. The ultimate resolution of the liability may result in an amount that is different from that provided.

d)  During this half year provisions no longer required of £0.5m, previously recorded within exceptional items as part of the strategic review in 2016/17, were reversed. In 2017/18, there was a net charge of £0.9m.

Enquiries

For further information please contact:

John Lewis Partnership
Simon Fowler
Partner & Director of Communications
tel: 07710 398460

Clayton Hirst
Partner & Group Head of Corporate Affairs
tel: 07947 708167

Sarah Henderson
Partner & Group Senior External Communications Manager
tel: 07764 676036 

Citigate Dewe Rogerson
Simon Rigby
Joint Managing Director
tel: 07771 784446

Jos Bieneman
Director
tel: 07834 336650

Ellen Wilton
Associate Director
tel: 07921 352851

John Lewis & Partners
Gillian Taylor
Partner & Head of External Communications
tel: 07919 057931

Emily Dimmock
Partner & Senior Communications Manager, Corporate
tel: 07712 545677

Waitrose & Partners
Graeme Buck
Partner & Head of Communications
tel: 07703 379561

Gill Smith
Partner & Senior Corporate PR Manager
tel: 07887 898133

Debt investors
Alan Drew
Partner & Head of Treasury and Corporate Finance
tel: 07525 582955

Notes to editors

The John Lewis Partnership operates 50 John Lewis & Partners shops across the UK, johnlewis.com, 352 Waitrose & Partners shops, waitrose.com and business to business contracts in the UK and abroad. The business has annual gross sales of over £11.5bn. It is the UK's largest example of an employee-owned business where all 83,000 staff are Partners in the business.

Waitrose & Partners has 352 shops in England, Scotland, Wales and the Channel Islands, including 65 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 & Partners exports products to more than 50 countries worldwide and has nine shops which operate under licence in the Middle East. Waitrose & Partners omnichannel business includes the online grocery service, waitrose.com, as well as specialist online shops including waitrosecellar.com for wine and waitroseflorist.com for plants and flowers. In recent months, Waitrose & Partners has been awarded the 'Sustainable Fish Counter of the Year' award from the Marine Stewardship Council, 'Deli Cheese Retailer of the Year 2018' (cheese counter) award at the International Cheese & Dairy Awards and 'Drinks Retailer of the Year' award from the Drinks Business Awards 2018.

John Lewis & Partners operates 50 John Lewis & Partners shops across the UK (36 department stores, 12 John Lewis & Partners at home and shops at St Pancras International and Heathrow Terminal 2) as well as johnlewis.com. John Lewis & Partners stocks around 350,000 separate lines in its department stores and johnlewis.com across fashion, home and technology. This year John Lewis & Partners won ‘Best Multichannel Retailer 2018’, ‘Best Clothing Retailer 2018’, and ‘Best Furniture Retailer 2018’ at the GlobalData Customer Satisfaction Awards 2018. John Lewis Finance offers a range of comprehensive financial services products – including Insurance, Foreign Currency, International Payments and the Partnership Card - delivering the values of expertise, trust and customer service expected from the John Lewis & Partners brand. www.johnlewisfinance.com

Download the John Lewis Partnership interim report 2018 (PDF 500KB)