Unaudited condensed Interim Financial Statements for the half year ended 30 July 2011
Strict Embargo: 7.00am
14 September 2011
Investing for growth
John Lewis Partnership plc Interim results for the half year ended 30 July 2011
- Gross sales £4.05bn, up £244.0m (6.4%)
- Operating profit £111.5m, down £33.7m (23.2%)
- Operating margin 2.75% (2010/11: 3.81%)
- Profit before tax £90.4m, down £20.1m (18.2%)
- Invested £253.8m in new branches, formats and concepts, up 65.0%
- Gross sales £2.63bn, up £209.7m (8.7%)
- Like-for-like sales up 4.0% (food only)
- Operating profit £110.2m, down £17.6m (13.8%)
- Gross sales £1.42bn, up £34.3m (2.5%)
- Like-for-like sales up 1.0%
- Operating profit £15.8m, down £18.9m (54.5%)
- 16 stores opened, including 8 in convenience format
- 5 Channel Island stores trading successfully
- Launch of Waitrose.com on a new technology platform
- Customer numbers up 300,000
- Investment up £48m to £150m
- £15m refurbishment at flagship store in Canary Wharf
- John Lewis Stratford opened 13 September
- Strong growth in johnlewis.com up 27.2%
- Johnlewis.com began delivering abroad in June and now live in 33 countries
- NKU applied to online price of 'bricks and mortar' competitors
Investment in our Partners
- Net 1,100 new jobs created
Charlie Mayfield, Chairman of the John Lewis Partnership commented:
'The Partnership has made good progress in the first half. Sales grew strongly although, as expected, profits were lower than in the same period in 2010 as we accelerated investment in our future growth plans, even though conditions remained extremely challenging.
The Partnership has always had a long-term outlook, and our business is stronger today because of it. We made significant investment in the first half and our capital expenditure increased by £99m to £254m.
Trading conditions are set to remain challenging through the rest of this year and into 2012. We are not simply waiting for the recovery, but instead we have increased the pace of investment and innovation across the Partnership putting us in the best possible position to seize the opportunity created by a rapidly changing retail environment. Our momentum is strong and I am confident we will build on that in the second half.'
The Partnership has made good progress in the first half. Sales grew strongly and, as expected, profits were lower than in the same period in 2010 as we accelerated investment in our growth plans. Our capital expenditure increased by £99m to £254m in the first half.
Sales in both Waitrose and John Lewis grew well ahead of their respective markets. Waitrose has now been the fastest growing supermarket for over two years and in John Lewis we gained market share in our three key areas of electrical and home technology (EHT), fashion and home.
We have often said we are a business with a long-term outlook. Our sales momentum today has much to do with decisions taken to invest during similarly difficult market conditions in 2008 and 2009. Our profit performance in the first half reflects not only the extremely challenging trading conditions, particularly in John Lewis, but also the significant investments we are making to accelerate growth and to seize the opportunities created by the structural shifts in how customers are shopping.
We accelerated our opening of new shops, with 16 new shops versus 9 last year, an increase of 220,000 square feet of new space.
We also accelerated our spending on systems and supply chain to increase our capacity to serve customers in the new ways they want to shop. In Waitrose we relaunched our online platform and will soon open a new customer fulfilment centre in Acton to support deliveries within the M25 and in John Lewis we added extra capacity for in-house picking and delivery of customer orders.
In the convenience market, we continued the roll-out of Little Waitrose with 8 more shops and 12 more planned in the second half, 2 more John Lewis at home shops planned for the second half and we will extend our popular Click and Collect service to 116 locations from next month.
In the face of increasing pressure on household budgets we increased our focus on offering value across all our ranges. In Waitrose we absorbed the majority of inflation within our prices, and in John Lewis, 'Never Knowingly Undersold' meant we met our promise to offer the best value both on the high street and online compared to 'bricks and mortar' competitors.
The Partnership delivered gross sales of £4.05bn for the first half of the year, an increase of £244.0m or 6.4% on last year, but operating profit at £111.5m, was down £33.7m or 23.2% on last year. Together these represent an operating profit margin of 2.75% (2010/11 3.81%). Profit before tax was £90.4m, a decrease of £20.1m, or 18.2%, on last year.
Planned investment in our customer offer, in service and efficiency and in future growth, together with a highly competitive trading environment, combined to hold back profit delivery.
Waitrose achieved another period of industry-leading sales growth and we have now outperformed the market for over two years. We were voted Which? Supermarket of the Year – fitting recognition of the commitment by 49,000 Partners to give customers the best possible service, products and shopping environment.
Gross sales were up 8.7% (£209.7m) to £2.63bn and food only like-for-like sales grew by 4.0%. Sales growth continued throughout the half, with like-for-like sales up 4.7% in Q1 and 3.4% in Q2. Operating profit reduced by £17.6m (13.8%) to £110.2m.
Compared to last year, 300,000 more customers shopped at Waitrose each week and market share increased by 0.2% to 4.1%.
Planned investment in our customer offer, in service and efficiency and in future growth held back profit delivery.
We pursued our multichannel strategy with the launch of a new technology platform in March and saw a 26.8% increase in sales. The service was renamed Waitrose.com and a nationwide marketing campaign highlighted the emphasis on high service standards from Waitrose Partners. The restriction on trading within the M25 came to an end and to support the expected high volumes in London we plan to open a fulfilment centre in Acton, West London, this autumn.
Our online service is complemented by convenience branches for fresh food top-ups, and Waitrose now has a total of 21 shops in this format. We plan to open a further 12 by the end of this year and intend that there should be more than 300 in our estate by the end of the decade.
At the end of July Waitrose had 259 shops, having opened eight supermarkets in the past six months, including the five acquired in the Channel Islands, and eight convenience stores. In addition, our flagship Canary Wharf branch underwent a £15m refurbishment - the biggest ever undertaken by Waitrose - and recently relaunched as the first Food, Fashion & Home shop. A further 20 shops, including convenience, are planned to open in the second half of the year.
With the rapid pace of growth and the development of different formats and channels, we have invested in the period in new, more flexible management structures in all our branches. Following a pilot last year, this significant move was implemented smoothly and is already bringing the benefit of greater efficiency and increased opportunities for managers and Partners.
Waitrose welcomed 2,400 Partners into new jobs.
Gearing for growth led to the purchase of a new 300,000 sq ft warehouse in Milton Keynes in March 2011. We have also announced our intention to open a new distribution centre in Chorley to support our expansion in the north of England and Scotland.
We continued to invest in value, quality and innovation. Essential Waitrose is now a £1bn per annum brand, giving customers value through entry-level prices with no compromise on quality or standards. The Brand Price Match promise, launched in November 2010, has over a thousand branded lines price-matched to Tesco. Over one thousand promotions in our branches every week have increased our promotional participation to 27%, up 3.3 percentage points on the same time last year.
Quality and innovation are at the heart of the brand. Our two brand ambassadors, Delia Smith and Heston Blumenthal, bring the Waitrose passion for good food and cooking to life in advertisements, publications and online.
We have built a best-in-class food development team and invested in new products, introducing 3,500 new lines this year. Two important launches took place in the first six months of this year: Good to Go, a range of 150 food products to be eaten on the move, and LOVE Life, a range of 270 delicious and nutritionally balanced products. The Menu From Waitrose; Seriously From Waitrose; Duchy From Waitrose and Heston From Waitrose brands form a market-beating unmatchable top tier.
The drive to bring Waitrose to more people in more places continued through strategic partnerships. Four more Waitrose outlets have opened at Welcome Break service stations, taking the total to 16 since May 2009. In the continuing trial, Waitrose food is sold in 34 Boots stores. We have also announced a new two-location pilot with Shell, starting this month in Watford and Kensington Gardens.
John Lewis continued to outperform the general market, consistently beating competitors. This achievement is a result of customers appreciating an innovative product offer, quality merchandise at every price point, ease of shopping through the multi-channel operation and the excellent customer service for which we are renowned.
Gross sales were up 2.5% at £1.42bn and like-for-like sales were up 1.0%. Operating profit fell by 54.5% to £15.8m.
Profits were impacted by our commitment to 'Never Knowingly Undersold' as well as a highly competitive trading environment. John Lewis continues our strategy to grow the business efficiently and invest for the long term.
Despite challenging trading conditions John Lewis won share in each of our three markets, and notably in Electricals. Home has inevitably been adversely affected by the housing market but is continuing to perform well. Home sales grew by 0.6%, Fashion by a very creditable 4.2% and Electricals and Home Technology (EHT), trading in a very competitive marketplace, grew sales by 3.8%.
Our very successful multichannel and online operations have been at the heart of John Lewis' performance. All three John Lewis markets were instrumental in driving sales in this area, with johnlewis.com outperforming its market and seeing 27.2% growth. This has been achieved through increasing the number of products and brands sold online, investing in distribution and developing the 'Click and Collect' option which allows customers the choice of picking up their online purchases from all 32 John Lewis and 24 Waitrose shops. As this facility has proved to be so popular, from next month the number of collection outlets will more than double to 116, including collection points in 84 Waitrose branches, with more being planned.
Johnlewis.com already accounts for 19% of total John Lewis sales. There is considerable opportunity for growth in the online operation, and our expectation is that johnlewis.com will be achieving sales of £1bn by 2014. This will be bolstered by the new online international operation which began delivering abroad in June and is now live in 33 countries.
We have continued to invest in all areas of the business. New concepts are being introduced across all branches, to ensure our shops remain appealing destinations in the internet age. These include a Beauty Retreat concept, recently launched at John Lewis Cheadle, and new concepts for Home and Technology as launched at John Lewis Stratford City. Designer collaborations, such as those with Osman Yousefzada and Clements Ribeiro in fashion and Bethan Grey in home are being introduced and at the same time private label collections such as the 'John Lewis & Co' classic menswear range and collaborations with emerging designers such as Ptolemy Mann and James Joyce in home are adding an extra dimension to the 'newness' on offer to John Lewis customers.
We continue our strategy to grow our selling space. We have just opened our exciting new John Lewis Stratford City shop, and in the next month two more at home shops will open in Chester and Tamworth. We are also exploring the opportunity to introduce full-line flexible format department stores in key locations in the UK. The first of these will be trialled in Exeter from autumn next year. At the same time John Lewis continues to work with developers to explore potential new locations for full-line flagship shops such as the one recently announced in Birmingham city centre.
Over 1,000 new Partners will be recruited to John Lewis to support our second half openings.
John Lewis' reputation for outstanding quality, value and service was again this year recognised by Verdict, awarding it 'Britain's favourite retailer' in 2011 for the eighth time in the award's 12 years.
Capital investment in the first six months of the year was £253.8m. In Waitrose we invested £149.5m, primarily on transforming five branches acquired last year from Sandpiper CI, which opened in the Channel Islands this year, nine new and acquired branches and eight convenience stores. In John Lewis we invested £75.7m primarily on the new store at Stratford, two new at home stores, and refurbishments at Reading, Cheadle and Peter Jones.
In addition, £28.6m was invested centrally, mainly in internally developed systems which support the growth and efficiency plans of Waitrose and John Lewis.
Cash generated from operations during the period was £238.2m. We remain committed to our focus on efficient cash, working capital and credit risk management.
On 7 March, we launched an innovative financing product, the John Lewis Partnership Bond which offered a competitive fixed return to investors, 4.5% plus 2% in John Lewis Partnership gift vouchers. This was well received and the gross proceeds were £57.8m. At the end of the first six months net debt was £760.8m. The Partnership balance sheet remains strong with substantial capacity to increase our borrowings should we wish to, and we remain well within the limits of the financial covenants in our bank facilities and bonds.
Our net finance costs fell by £13.6m (39.2%) to £21.1m. Finance costs on borrowings have increased by £5.2m, reflecting a net increase of £142m in our Bonds, together with the launch of the Retail Bond of £57.8m. Last year we paid a premium of £9.2m on the partial buyback of the 2012 Bond. These costs have been partly offset by a net credit on pension and long leave financing costs of £9.4m, compared to a charge of £1.7m last year.
The triennial actuarial valuation of our main non-contributory defined benefit final salary pension scheme as at 31 March 2010 resulted in a surplus of £83m, which we estimate has grown to £112m at 30 July 2011. The triennial actuarial valuation is the basis on which the Partnership manages and funds the pension liability. The pension scheme adopts a prudent but active investment strategy and the Board is comfortable with the current funding level.
The total accounting pension deficit at 30 July 2011, which assumes more cautious investment returns than the actuarial basis of valuation, increased by £65.3m (15.8%) to £479.3m. The accounting valuation of pension fund liabilities increased by £145.0m (5.0%) to £3,025.0m, while pension fund assets increased by £79.7m (3.2%) to £2,545.7m. Net of deferred tax the deficit was £381.8m.
The Pension Fund took the opportunity in February to sell its remaining stake in Ocado for £150.5m, an uplift of £23m on the January 2011 value.
Corporate Social Responsibility
The Partnership values its relationships with its Partners, customers, suppliers, the environment and the wider community and has renewed its commitment to Social Responsibility at divisional level with the launch of the 'Waitrose Way' in Waitrose and 'Bringing Quality to Life' in John Lewis.
The 'Waitrose Way' covers four areas that resonate with our customers: Championing British, Living Well, Treading Lightly and Treating People Fairly, while in John Lewis 'Bringing Quality to Life' has three main areas of focus: A Better Way of Doing Business, Encouraging Sustainable Living and Community Links.
These represent a fresh approach that demonstrates the Partnership's commitment to Social Responsibility while making our approach more visible and simpler for customers and Partners to understand and for our Partners to explain.
After six weeks, Partnership gross sales are 7.4% higher than last year. Waitrose gross sales have increased by 10.0% (3.9% like-for-like) and John Lewis gross sales are 3.2% higher than last year (1.9% like-for-like).
Trading conditions are set to remain challenging through the rest of this year and into 2012. There are huge changes taking place in the way people shop as a result of technology reaching every part of our lives, and there is an ever greater demand for convenience and value. We are not simply waiting for the recovery, but instead we have increased the pace of investment and innovation across the Partnership putting us in the best possible position to seize the opportunity created by a rapidly changing retail environment. Our momentum is strong and I am confident we will build on that in the second half.
Charlie Mayfield, Chairman
Where this interim report contains forward-looking statements, these are made by the directors in good faith based on the information available to them up to the time of their approval of this report. These statements should be treated with caution due to the inherent uncertainties underlying any such forward-looking information.
Notes to editors
The John Lewis Partnership - The John Lewis Partnership operates 33 John Lewis shops across the UK (29 department stores and four John Lewis at home), johnlewis.com and 264 Waitrose supermarkets. The business has annual gross sales of over £8.2bn. It is the UK's largest example of worker co-ownership where all 76,500 staff are Partners in the business.
Waitrose - Waitrose, Britain's favourite supermarket*, has 264 shops in the UK and Channel Islands and is consistently achieving sales growth significantly ahead of the market.**. Its strong performance has been driven by the success of the essential Waitrose range, Brand Price Match, an unmatchable top tier of products and free delivery driving rapid online growth, as well as a long term commitment to sourcing the UK's finest local and regional foods. Waitrose 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.(www.waitrose.com)
* Which? Annual Supermarket Satisfaction Survey, Telegraph Magazine Shop Awards - Best for Food & Drink; Good Housekeeping Awards; Verdict Consumer Satisfaction Awards - Most Loved Food Retailer
** Kantar Worldpanel
You can follow Waitrose on the following social media channels:
John Lewis - John Lewis, 'Britain's favourite retailer 2010'* and 'Multiple Department Store of the Year 2010' ** typically stocks more than 350,000 separate lines in its department stores. The website stocks over 150,000 products focused on the best of fashion, beauty, home and giftware and electrical items including online exclusives. johnlewis.com is consistently ranked one of the top online shopping destinations in the UK. ( www.johnlewis.com ). John Lewis Insurance offers a range of comprehensive insurance products - home, car, wedding and event, travel and pet insurance and life cover - delivering the usual values of expertise, trust and customer service expected from the John Lewis brand.
* Verdict consumer satisfaction index, January 2011
** The Drapers Awards for fashion retail, November 2010
You can follow John Lewis on the following social media channels:
Download the John Lewis Partnership interim report 2011 (PDF size: 2.9MB).
Notes to editors
For further information, please contact:
John Lewis Partnership
Director of Communications
Telephone: 020 7592 6292
Citigate Dewe Rogerson
Simon Rigby/Justin Griffiths
Telephone: 020 7638 9571
Head of Communications
Telephone: 020 7592 6274
Mobile: 07785 952567
Senior Manager, Corporate, Digital & Branch PR
Telephone: 020 7592 6452
Moblie: 07525 273077
Mobile: 07764 676414
Senior PR Manager, Corporate
Mobile: 07525 271618