John Lewis Partnership plc Interim results for the half year ended 26 July 2014
Unaudited condensed Interim Financial Statements for the half year ended 26 July 2014
Strict Stock Exchange Embargo, 7.00am
Growing customer numbers drive sales in a changing market
|Operating profit before exceptional item(2)(3)||145.2||(9.4)%||56.3||62.2%(4)||176.1||8.6%|
|PBT before exceptional item(2)(3)||129.8||12.1%|
1 Waitrose like-for-like sales excludes petrol
2 Exceptional charge of £47.3m last year following review of holiday pay policy
3 Includes property profits of £10.5m in Waitrose and £0.5m in Group (2013/14: nil)
4 Includes restructuring costs of £15.4m in 2013/14
- Sales continued to outperform the industry, for the 62nd consecutive month(5); market share increased to 5%
- Total online services gross sales of £161m, with online grocery gross sales up 54%
- Operating profit impacted by substantial levels of investment across the business and the market(5) sales slowdown
- 15 new branches opened, 11 more than in the same period last year
- 670,000 more weekly customer transactions(6)
- Membership of myWaitrose scheme up to 4.8 million
- Sales growth and market share increases across all categories
- Online sales of £552m, up 25.6% and now representing over 30% of merchandise sales; shop sales increased by 3.6%
- Opened new full line flexible format shop in York and first airport shop in Heathrow Terminal 2
- Customers and Partners celebrated 150th anniversary
- First phase of second National Distribution Centre in Milton Keynes completed
(6) Including myWaitrose benefits
Sir Charlie Mayfield, Chairman of John Lewis Partnership, commented:
'Partnership sales grew strongly at 6%, with Waitrose and John Lewis both outperforming their respective markets. Profit before tax and exceptionals is ahead of last year by 12%, but is broadly flat after excluding property profits.
Our sales growth was driven by more customers shopping with Waitrose and John Lewis, with customer numbers up by over 6% and 4% respectively. This reflects the growing appeal of our omni-channel offer across both brands, including the success of Click & Collect, which now accounts for more than half of John Lewis orders placed online, and the popularity of the myWaitrose and my John Lewis programmes, which are encouraging customers to shop more frequently with us across all of our channels.
Profit before tax and exceptional item, of £129.8m, is 12% ahead of last year, benefiting from property profits of £11m. Operating profits in John Lewis rose by 62% (£22m), offset by a decline in Waitrose operating profits of 9% (£15m). The strong profit performance in John Lewis reflects robust sales growth across all categories, especially in the higher margin 'Home' category, and good cost control across the business. In Waitrose, profits were lower as a result of a much higher level of investment in new branches and accelerating the growth of the business through investment in Waitrose.com and the myWaitrose programme, as well as the challenging market conditions. However, Waitrose sales performance continued to be well ahead of the market.
Across the Partnership we continued to step up our level of investment in our systems and supply chain, with total capital investment almost doubling versus last year.
Our first half performance has been hard won. I want to acknowledge the tremendous efforts of all Partners, our co-owners, in achieving these results through a period of significant change, including implementing new IT systems and adopting new ways of working.'
The outlook in the grocery sector remains challenging and we expect that to continue to be the case for some time. In contrast, trading conditions in the non-food sector are more positive than has been the case for several years.
Against this backdrop, we have had an encouraging start to the second half. For the first six weeks of the second half, Partnership gross sales are up 7.5%. Waitrose gross sales have increased by 5.2% (0.9% like-for-like, excluding petrol) and John Lewis gross sales are 11.3% higher than last year (9.7% like-for-like).
Looking ahead, as always, much will depend on Christmas trading, plans for which look excellent. While we expect the grocery sector to remain challenging, we anticipate sales at both Waitrose and John Lewis will continue to outperform their respective markets in the second half, reflecting the strength of both brands.
In the first six months of the year, the Partnership delivered good sales growth. Both Waitrose and John Lewis grew sales well ahead of their respective markets, increasing their market shares. Partnership gross sales (inc VAT) were £5.01bn, an increase of £282.3m, or 6.0%, on last year. Revenue, which is adjusted for sale or return sales and excludes VAT, was £4.46bn, up by £242.4m or 5.7%.
Partnership operating profit was £176.1m, up £61.2m, or 53.3% on last year. After excluding last year's exceptional item, it was up by £13.9m or 8.6%.
Profit before tax was £129.8m, up by £61.3m, or 89.5% on last year. After excluding last year's exceptional item it was up by £14.0m or 12.1%.
Gross sales in the first half grew by 4.1% to £3.15bn with like-for-like sales up 1.3%. This sales performance was delivered in a period of significant structural change for UK food retail. Operating profit for the half was down by 9.4% to £145.2m, however this performance benefited from property profits of £10.5m (2013: nil). The decline in profit was mainly as a result of the substantial levels of investment made across the business and, to a lesser extent, the tough market conditions. Like-for-like sales were ahead, despite the market conditions, price investment and strong comparative growth in the same period last year.
Our market share grew to 5% and we had on average 670,000 more customer transactions a week, compared to the same period last year.
Being employee-owned allows us to take a long-term view about what is right for our customers and our business. We have maintained the level of investment needed to create the modern Waitrose. Our significant investments in new and existing space, online, convenience, price, hospitality, services and in deepening our understanding of our customers, positions us well for the future.
Our programme of investment in new and existing shops scaled up in the first half. We opened 15 new branches, compared with four new branches and one relocation in the same period last year. We also opened in five additional Welcome Break locations.
We have continued to invest in our core estate, carrying out three major refurbishments and one significant extension (compared to none in the same period last year) and revamping the front of store in a further 40 shops with welcome desks (compared to 15 in the same period last year) and a further 76 shops with horticulture pods (compared to 44 in the same period last year).
In addition, we are developing our supply chain infrastructure to support future growth and the expansion of multichannel retailing. Our new distribution centre in Leyland became fully operational in the half, and we began work on Waitrose's first National Distribution Centre at Magna Park in Milton Keynes.
Waitrose.com was an area of significant investment and performed strongly in the period with grocery gross sales up 54%. We recruited 46,000 new customers and increased the number of delivery slots available by 79% compared with the same period last year. We launched the new Cellar wine website in May and we will shortly launch Click & Collect for Cellar orders. We are also increasing the number of branches offering Click & Collect for Waitrose grocery orders. In addition, more branches will be handling Click & Collect for John Lewis orders, supported by new processes that will make the service more efficient and faster.
We continued to invest in price during the half. This includes matching Tesco on branded products (excluding promotions) and Sainsbury on own-label, increased promotional participation and special deals for our myWaitrose customers, including 10% off hundreds of everyday products every week.
We saw continued strong take-up of the myWaitrose card and the associated offers and the number of myWaitrose customers now stands at 4.8 million. As well as driving incremental sales, myWaitrose is transforming our understanding of customers and allows us to target and personalise our marketing communications.
We invested in innovative marketing campaigns, including developing our own content for Waitrose TV, launching Weekend Kitchen with Waitrose on Channel 4, as well as launching our new brand advertising focusing on the difference our Partners make.
Along with the best service, top quality products are at the heart of our brand. Product innovation continued apace with the launch of the new Alan Titchmarsh and Waitrose gardening range, Asian Fusion ready meals and the great value Pure beauty range. Our successful essential Waitrose range topped 2,500 products as it celebrated its fifth birthday, while our Heston from Waitrose range has been further expanded.
Gross sales in the first half were up 9.4% to £1.87bn, with like-for-like sales up 8.2%. Operating profit increased by 62.2% to £56.3m.
Our strategy of combining the best brands with an ambitious John Lewis own-brand offer is resulting in sales growth and market share gains across all three categories.
- Home increased by 7.4%, driven in part by the revitalisation of the housing market. Although 'House' remained our biggest brand in Home, the introduction of the 'Croft' range proved popular as customers looked for a balance between classic and contemporary design.
- Fashion was up 9.1%, with online fashion sales growth particularly strong at 33.9%. In response to the continued success of our own-brand offer, we recently launched our first John Lewis & Co. men's formalwear collection.
- Electricals and Home Technology (EHT) delivered growth of 11.7%. For the first time we introduced a John Lewis own-brand smart TV, and our minimum two-year guarantee commitment continues to be a key differentiator for customers.
A year on from launching our new web platform, johnlewis.com sales are up 25.6%, outperforming the industry (IMRG) by 16% in the first half. The online business now accounts for over 30% of John Lewis merchandise sales. Click & Collect sales have grown by nearly 50% and now make up over half of online orders. In addition, a continued focus on our mobile strategy has led to over half the traffic to johnlewis.com coming from mobile and tablet devices. This Christmas the cut-off time for ordering for next day collection will be extended to 8pm, complemented by the addition of over 90 new Waitrose locations and the nationwide rollout of CollectPlus.
Investment has continued in new and existing shops as we continue to develop our portfolio. John Lewis York opened in April and, combined with the success of our Exeter shop, demonstrates that there is a role for a smaller department store format to complement regional flagships and at home branches in our future growth. Our first airport shop at Heathrow Terminal 2 opened in June and, as part of our ongoing efforts to meet customers' demand for more convenient ways to shop, we announced that a new 'Click & Commute' shop will open this autumn at St Pancras station. Our next full-line department store will open in Birmingham in 2015, along with shops in Basingstoke and Horsham.
We have also invested in new social experiences in our shops. July marked the opening of two restaurants in John Lewis Oxford Street, Italian restaurant Rossopomodoro and the UK's first outlet of Ham Holy Burger, building on the successful launch of Hotel Chocolat and Joe & Juice cafés last year.
Investment in systems and infrastructure continued apace, with the completion of building work at John Lewis' second National Distribution Centre in Milton Keynes allowing the site to be used as support for existing operations ahead of full operations starting in 2016.
Our 150th anniversary was a unique opportunity to create memorable experiences for our customers and Partners, as well as to collaborate with famous brands to create special edition products. For the first time, we opened the roof garden of our Oxford Street shop and built an interactive exhibition to tell the story of the Partnership. These experiences were enjoyed by more than 150,000 customers. We celebrated our role as the Official Department Store Provider to the Commonwealth Games with a pop-up urban garden in Glasgow city centre, and our brand benefited from its association with a celebrated national event.
Innovation remains key to staying ahead in a competitive retail market and the launch of JLAB, our first-ever technology business incubator, has opened us up to innovative ideas from start-up companies. More than 500 small businesses registered their interest in the chance of a £100,000 investment and the opportunity to trial their technology in our shops.
Partnership Services and Group
Partnership Services and Group includes the operating activities for our Group offices and shared services as well as the costs for transformation programmes and certain pension operating costs. Partnership Services and Group net operating costs decreased by £7.3m to £25.4m.
Investment in the future
Capital investment in the first half of the year was £332.1m, an increase of £166.5m (100.5%) on the previous year. This includes £90.5m invested in freehold properties, an increase of £66.2m on the previous year, and includes seven freehold branches purchased from the Co-operative.
The majority of our spend continues to be invested in our store base, either on new stores or the refurbishment of existing ones. However, to enhance the agility and robustness of our systems and infrastructure, we almost doubled our capital investment in distribution and IT.
Investment in Waitrose was £220.2m, up £120.4m (120.6%) on the previous year, and in John Lewis investment was £91.3m, up £37.1m (68.5%).
The pension operating cost was £92.1m, an increase of £8.1m or 9.6% on the prior year costs before the exceptional item, reflecting changes to financial assumptions and growth in scheme membership. Pension finance costs were £19.8m, an increase of £2.1m or 11.9% on the prior year, reflecting a higher accounting pension deficit at the beginning of the year than at the beginning of the previous year. As a result, total pension costs were £111.9m, an increase of £10.2m or 10.0% before last year's exceptional item.
Following the conclusion of the triennial actuarial valuation of our defined benefit pension scheme as at 31 March 2013, we agreed to increase the ongoing contribution rate to 16.4% of members' gross taxable pay and put in place a plan to eliminate the deficit over a 10 year period through a one-off contribution and annual deficit reduction contributions. In the first half of the year total contributions to the pension scheme totalled £100.6m, an increase of £43.2m or 75.3% on the prior year.
The total accounting pension deficit at 26 July 2014 was £1,029.0m, an increase of £25.6m (2.6%) since 25 January 2014. Net of deferred tax, the deficit was £843.5m. The accounting valuation of pension fund liabilities increased by £218.8m (5.2%) to £4,437.0m, while pension fund assets increased by £193.2m (6.0%) to £3,408.0m.
The pension continues to be one of the most important benefits offered to Partners, but it also accounts for the greatest single investment made each year by the Partnership. The review of the pension scheme, to ensure that it can remain fair to Partners and affordable from a business perspective, is ongoing with a revised draft proposal published in July. The proposal is to move to a hybrid scheme combining defined benefit and defined contribution pensions, where future pension risk is shared between Partners and the Partnership. Partners remain at the centre of the review as co-owners of the business and have the opportunity to share their views. A decision is expected to be reached by Partnership Council and the Partnership Board in early 2015 following consultation with Partners.
Net finance costs on borrowings and investments decreased by £4.5m (15.3%) to £25.0m. After including the financing elements of pensions and long service leave and non-cash fair value adjustments, net finance costs decreased by £0.1m (0.2%) to £46.3m.
At 26 July 2014, net debt was £755.9m, an increase of £270.1m (55.6%) in the half year and £262.5m (53.2%) higher than 27 July 2013. The year-on-year increase reflects the funding to support the significant step up in capital investment across the Partnership. We expect net debt at the end of the year to be at a broadly similar level to January 2014.
Consistent with our belief in the importance of taking a long-term view, this year we are undertaking a thorough review of the medium to long-term CSR challenges facing the business. This will inform our business plans moving forward and ensure we continue to reduce our environmental impact, while supporting communities where we trade and maintaining scrupulous relations with our suppliers around the world.
Meanwhile, we have continued to deliver against our existing ambitious commitments. For example, our new John Lewis branch in York, which opened in April, is the lowest carbon branch on the John Lewis estate and includes many innovative design features to support the local area's biodiversity. The branch has been assessed as Outstanding under the BREEAM rating system for buildings. To date, the Partnership remains the only retailer to have achieved the 'Outstanding' rating for any of its stores.
Our business has always recognised the importance of building sustainable supply chains and working closely with suppliers and communities. We were delighted that, on World Oceans Day, Waitrose was named Best Certified Fish Counter 2014, for selling the broadest range of Marine Stewardship Council certified options of any UK supermarket. Waitrose also relaunched its national 'Grow and Sell' scheme to encourage schoolchildren to produce food and sell it; the scheme has nearly trebled in size since it launched, teaching children land management and entrepreneurial skills. In India, a new school, funded by the John Lewis Foundation, opened in Bhadohi, a region where a number of our rug suppliers are located, providing much needed access to education for girls, and signalling our long-term commitment to the area.
Notes to editors
The John Lewis Partnership - The John Lewis Partnership operates 42 John Lewis shops across the UK (31 department stores, 10 John Lewis at home and a shop at Heathrow Terminal 2), johnlewis.com, 326 Waitrose shops, waitrose.com and business to business contracts in the UK and abroad. The business has annual gross sales of over £10bn. It is the UK's largest example of employee-owned business with over 90,000 staff who are all Partners in the business.
Waitrose - the Nation's Favourite Supermarket¹ and winner of the BestSupermarket² and Best Food and Grocery Retailer³ awards - currently has 326 shops in England, Scotland, Wales and the Channel Islands, including 51 convenience branches, and another 28 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 50 countries worldwide and has seven shops in the Middle East.
¹ Conlumino Awards, 2014
² Good Housekeeping Best Supermarket 2014, Which? Best Supermarket 2014
³ Verdict Best Food and Grocery Retailer 2014
John Lewis - John Lewis, 'Multichannel Retailer of the Year 2014'4, 'Best Overall Retailer'5 and 'Best Retailer 2014'6, typically stocks more than 350,000 separate lines in its department stores across fashion, home and technology. Johnlewis.com stocks over 250,000 products, and 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 values of expertise, trust and customer service expected from the John Lewis brand.
4 Oracle Retail Week Awards 2014
5 Verdict Consumer Satisfaction Awards 2014
6 Which? Awards 2014
Where this interim report contains forward-looking statement 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 inherent uncertainties underlying any such forward-looking information.
For more information view the unaudited condensed interim financial statements for the Half-year ended 26 July 2014 (PDF 218KB).
For further information please contact:
John Lewis Partnership
Andrew Moys, Director of Communications
Telephone: 07525 272377
Neil Spring, Senior Communications Manager
Telephone: 07890 777464
Citigate Dewe Rogerson
Simon Rigby / Jos Bieneman
Telephone: 020 7638 9571
Peter Cross, Director, Communications
Telephone: 07764 697674
Louise Cooper, Head of External Communications
Telephone: 07808 574117
Christine Watts, Communications Director
Telephone: 07764 676414
Gill Smith, Senior Manager, Corporate PR
Telephone: 07887 898133