John Lewis Partnership plc Interim results for the half year ended 1 August 2015
Unaudited condensed Interim Financial Statements for the half year ended 1 August 2015
Strict Stock Exchange Embargo, 7.00am
Solid first half for the Partnership in a difficult market
|Operating profit before exceptional item(2)(3)||135.5||(6.7)%||47.1||(16.3)%||144.9||(17.7)%|
|PBT(4)before exceptional item(2)(3)||96.0||(26.0)%|
(1) Waitrose like-for-like sales excludes petrol
(2) Exceptional income of £128.0m (2014/15: £nil) following the sale of the Clearings building
(3) Includes property profits of £nil (2014/15: £10.5m in Waitrose and £0.5m in Group). Excluding property profits, Waitrose operating profit is up 0.6%
(4) Profit before Partnership Bonus and tax
- Robust sales performance and increased market share(5) in both Waitrose and John Lewis
- Continued growth in customer numbers, up 7% in Waitrose and 6% in John Lewis
- 18% increase in number of active myWaitrose card holders and strong take-up of 'Pick Your Own Offers' scheme with 700,000 customers now taking part
- 5 new Waitrose branches and a new .com distribution centre in Coulsdon; first John Lewis full line department store in 4 years set to open in Birmingham following £35m investment
- Waitrose national distribution centre (NDC) opened and announcement of third John Lewis NDC, both in Milton Keynes
- International expansion with new John Lewis shop-in-shops in Singapore and the Philippines
- Operating profit before property profits up £0.8m (0.6%) in Waitrose and down £9.2m (16.3%) in John Lewis; both impacted by incremental holiday pay costs(6) and a higher share of central costs as well as restructuring costs in John Lewis
- Waitrose total volume growth of 1.8%; LFL sales decline of 1.3% reflecting tough grocery market conditions, with price deflation, and strong prior year comparative through promotion-driven online performance last year
- Johnlewis.com gross sales(7) up 17.1% to £647m. Sales transacted in shops decreased 1.8%, partly due to comparison to 150 Year anniversary celebrations last year, but were up 1.7% over a two year period
- PBT before exceptional items down 26.0%, predominantly due to higher pension charges, arising from volatility in the market driven assumptions, and last year’s property profits
- As pension charges for the full year will be approximately £60m higher than the comparable figure for last year, and given the tough trading environment, PBT before exceptional items for the year ending 30 January 2016 expected to be between £270m and £320m versus £342.7m last year
- Strong cash generation driven by lower capital investment and the sale of the Clearings building
- Net debt(8) of £664.6m, £30.2m (4.3%) lower than July 2014 despite the issue of a £300m bond in December 2014, with net proceeds contributed to the pension scheme
- Pension deficit of £1,156.4m, £92.9m (7.4%) lower than January 2015
Sir Charlie Mayfield, Chairman of the John Lewis Partnership, commented:
'This has been a solid first half for the Partnership in a difficult market. Both Waitrose and John Lewis are growing sales and increasing market share. Profit before tax and exceptionals was down by £33.8m to £96.0m, predominantly driven by higher pension charges arising from volatility in the market driven assumptions and last year’s property profits. Excluding these, at a trading level our profits were broadly level with last year, despite the turmoil in the grocery market. That reflects tight management of costs and the steps we have taken to strengthen the appeal of our trading brands, where we have seen an encouraging increase in the number of customers shopping with us.
Conditions in the market will remain difficult, especially in grocery where there is little sign of any price inflation. However, I expect sales in both Waitrose and John Lewis to perform comparatively well against the market, helped by promising new ranges and online capability.
For the full year, pension charges will be approximately £60m higher than the comparable figure last year, predominantly arising from volatility in the market driven assumptions. In the current market, even a strong trading performance is unlikely to offset this fully and therefore we expect to see Profit before Partnership Bonus, tax and exceptionals of between £270m and £320m, versus £342.7m last year. Despite this, through tight cash management, we expect to achieve a further reduction in our net debt.'
In the first six months of the year, the Partnership delivered robust sales growth. Both Waitrose and John Lewis grew sales ahead of their respective markets, increasing their market shares. Partnership gross sales (inc VAT) were £5.12bn, an increase of £105.2m, or 2.1%, on last year. Revenue, which is adjusted for sale or return sales and excludes VAT, was £4.55bn, up by £86.0m or 1.9%.
Partnership operating profit was £272.9m, up £96.8m, or 55.0% on last year. This includes exceptional income of £128.0m following the sale of the Clearings building. Excluding the exceptional item, operating profit was £144.9m, down £31.2m or 17.7% on last year.
Profit before tax was £224.0m, up by £94.2m, or 72.6% on last year. Excluding the exceptional item it was £96.0m, down by £33.8m or 26.0%.
Despite exceptionally tough conditions in the UK grocery market caused by falling prices and changing customer shopping patterns, our plans to create Modern Waitrose progressed well as we continued to outperform the industry on sales and increased our market share and volumes. Gross sales for the first half grew by 1.1% to £3.18bn, with like-for-like sales down 1.3%. We had on average 280,000 more customer transactions each week compared to the same period last year, total volume growth of 1.8% and our market share(9) grew to 5.1%.
Operating profit before property profits was up 0.6% to £135.5m, despite incremental costs for holiday pay and absorbing a greater share of centrally incurred functional costs. Effective management of our costs and capital expenditure, together with a focus on efficiency throughout the business, helped our profit position.
Because we are confident in our value, quality, provenance and service we have not joined the industry in across-the-board price cutting aimed at driving volume in the short-term. Our approach is to achieve sustainable sales growth through the targeted price investment of our 'Pick Your Own Offers' scheme which launched in June. This gives myWaitrose members the power to choose the ten products (from a list of nearly a thousand) on which they can save 20% every time they shop, whether in branch or online.
The scheme has had a strong take-up with 700,000 customers now taking part and is a clear example of how myWaitrose is enabling us to deepen our relationships with our customers. There has been a year-on-year 18% uplift in the number of active myWaitrose card holders.
Building our online business is also a key strategic driver. Although online grocery gross sales were down 13.0%, these were impacted by a strong promotion-driven performance last year. Average order value was up by 8.2%. We closed our Acton.com fulfilment centre in the half and our first purpose-built .com distribution centre opened in March on a seven acre site in Coulsdon, increasing our capacity to handle online orders in London by a third.
We opened five new branches in the first half, including one acquisition, two relocations and one convenience store, and announced the planned closure of two convenience stores. In August we opened a branch in Bagshot and there are five more core branches, two major redevelopments and one convenience store planned for the rest of this year.
Creating additional reasons for customers to visit branches in the online era is a key part of Modern Waitrose and the newly-opened core shops all have hospitality offers. Our hospitality business successfully taps into the growing trend for casual dining and showed increases of 23.5% in the first half.
We now have 114 cafes in our branches and 35 bakery grazing areas, with grazing planned for 26 more branches in the second half. In addition we now have outdoor seating in 82 branches.
Offering services is another way we attract customers into our branches. The popularity of Click & Collect continues to grow, with orders up nearly 50%, and we have introduced foreign exchange Click & Collect in 94 branches. Dry cleaning is now offered in 128 shops.
We continued to invest in transforming our IT capability, which is the enabler for strategic developments such as Pick Your Own and the growth of our online business. We are also using technology to improve customer service and to drive efficiency. Our customers were some of the first to use Apple Pay when it launched in the UK in July.
We also maintained investment in our supply chain and our first National Distribution Centre opened in Milton Keynes at the end of July and will handle 25,000 longer-life ambient products.
John Lewis saw solid sales growth in the first half, with gross sales of £1.94bn and like-for-like sales up 3.0%. Operating profit fell by 16.3% to £47.1m, impacted by restructuring costs, incremental costs for holiday pay and absorbing a greater share of centrally incurred functional costs. It also reflects the costs associated with the ongoing shift in both channel and fulfilment mix, a consequence of operating in an omni-channel world.
We continued to outperform both the BRC and IMRG- a good performance in the context of lower consumer confidence at the beginning of the year. The results are also achieved against a strong Spring / Summer season last year, with 2014 boosted by our 150 Year anniversary promotions and exceptional demand for Electricals and Home Technology (EHT) products in the run-up to the FIFA World Cup.
Gross sales in our fashion and home directorates accelerated during the period whilst EHT experienced a slower market.
- Fashion was the standout performance, up 7.5%, with our strategy of combining an ambitious John Lewis own-brand offer with the best of other brands continuing to pay dividends. Menswear was particularly strong, up 10.5%, with John Lewis Kin tailoring up 23.9%. A new womenswear collaboration with the designer Bruce Oldfield started in September.
- Sales in Home were up 4.9% - a good performance against the impact of the General Election and a late start to summer sales. Outdoor living was up 33.5%. Own-brand continues to be our star performer with our newest range, Croft, achieving an increase of 87.5%.
- In EHT, sales fell by 0.7% against strong figures from the same period last year and impacted by a lack of new product launches in the home technology market. In the first half we launched sim-free mobile phones and announced a partnership with Vodafone to sell John Lewis mobile contracts. We have also announced that Apple Watch will be available in our shops, which will give us more momentum in technology sales for the second half.
Johnlewis.com gross sales(10) grew by 17.1% to £647m. Online returns to shops are currently deducted from shops sales, but from 2016/17 onwards we intend to change our reporting so that online returns to shops are deducted from online sales. After four years of consecutive growth, sales transacted in our shops were down by 1.8%, partly due to comparison to our 150 Year anniversary celebrations last year, but up 1.7% over a two year period. Our main focus continues to be on investing in both our shops and online to maintain and develop our omnichannel proposition.
John Lewis Birmingham, opening in September, will be our first full line department store to open in four years and represents a £35m investment in the heart of the UK's second city. It will be the first to feature new concepts including an &Beauty spa. September also saw the reopening of our home department at Oxford Street after a £14m investment, which will showcase London's largest single selection of home products and services, and underline our leadership in this key market. The first half saw the opening of a new at home shop in Horsham, which will be followed by a further at home shop in Basingstoke in October.
Our range of in-store services and experiences continued to expand during the half with the opening of three foreign exchange bureaus and the announcement of ten further Joe & the Juice or Rossopomodoro restaurants, and another in-store Opticians. We have expanded our international footprint, with shop-in-shops in Singapore and the Philippines joining our existing Korean sites.
Alongside our shop investment we continue to focus on the strength of our distribution model, with the announcement of a third national distribution centre in Milton Keynes. We are determined to build a sustainable model so that we deliver on our customer promises at Christmas. In addition, the introduction of a £30 threshold for free Click & Collect has gone smoothly.
Looking forward, Black Friday and Christmas will again be defined by the importance of logistics and operational excellence, coupled with ensuring our shops remain the 'must visit' destination on the high street. We go into the second half with confidence in both our ability to deliver outstanding customer service and in our strongest-ever product assortment.
Partnership Services and Group
Partnership Services and Group includes the operating costs 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 £14.6m or 47.2% reflecting lower costs for transformation programmes and an increase in the share of functional costs charged to Waitrose and John Lewis. However, overall costs increased by £12.3m to £37.7m predominantly due to the increase in pension operating costs resulting from changes in financial assumptions.
Investment in the future
Capital investment in the first half of the year was £237.9m, a decrease of £94.2m (28.4%) on the previous year. However, we have continued to increase our investment in IT and distribution, which now represents 48% of our total capital investment.
Investment in Waitrose was £114.8m, down £105.4m (47.9%) on the previous year, and in John Lewis investment was £109.2m, up £17.9m (19.6%).
The pension operating cost was £122.4m, an increase of £30.3m or 32.9% on the prior year costs, predominantly reflecting the substantial decline in the real discount rate used to determine the cost to 0.35% at the beginning of the year from 1.10% at the beginning of the previous year. Pension finance costs were £18.5m, a decrease of £1.3m or 6.6% on the prior year, reflecting a reduction due to the lower discount rate partly offset by 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 £140.9m, an increase of £29.0m or 25.9% on the prior year.
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. However, to secure long term debt at low interest rates, we issued a £300m bond in December 2014 and used the net proceeds of the issue to prepay almost 7 years of the previously-agreed deficit reduction contributions to the pension scheme. As a result, in the first half of the year total cash contributions to the pension scheme totalled £82.8m, a decrease of £17.8m or 17.7% on the prior year. Our next triennial actuarial valuation will take place as at 31 March 2016.
The total accounting pension deficit at 1 August 2015 was £1,156.4m, a decrease of £92.9m (7.4%) since 31 January 2015, mainly reflecting a marginal increase in the real discount rate used to value the liabilities. Net of deferred tax, the deficit was £944.1m. The accounting valuation of pension fund liabilities decreased by £11.0m (0.2%) to £5,290.0m, while pension fund assets increased by £81.9m (2.0%) to £4,133.6m.
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 move to a hybrid pension scheme combining defined benefit and defined contribution pensions, where future pension risk is shared between Partners and the Partnership, was approved earlier this year. However, the changes will only start impacting our pension operating costs during 2016/17 and will take a number of years to be fully effected.
At 1 August 2015, net debt(11) was £664.6m, a decrease of £57.1m (7.9%) in the half year and £30.2m (4.3%) lower than 26 July 2014. Net debt decreased year-on-year, despite the issue of a £300m 4.25% bond in December 2014 with net proceeds contributed to the pension scheme. The reduction reflects our focus on cash generation, the reduction in capital investment and the completion of the sale of our Clearings building. We expect our net debt at the end of the year will be materially lower than at January 2015.
Net finance costs on borrowings and investments increased by £6.1m (24.4%) to £31.1m, reflecting the additional finance costs on the £300m bond issued in December 2014. After including the financing elements of pensions and long service leave and non-cash fair value adjustments, net finance costs increased by £2.6m (5.6%) to £48.9m.
Our sustainability strategy is bringing together the outcomes of our recent materiality assessment. We have prioritised the issues in our supply chains, our operations and our communities which are of greatest importance to our Partners, our stakeholders and the long-term commercial health of the business. Further details on our strategy and performance are included in our Annual Report & Accounts.
(6) Incremental costs to take paid overtime into account when calculating holiday pay for Partners
(7) Online returns to shops deducted from shop sales
(8) Net debt has been restated for 2014/15. See note 2 of the interim statement on page 12 for further details
(10) Online returns to shops deducted from shop sales
(11) Net debt has been restated for 2014/15. See note 2 of the interim statement on page 12 for further details
For more information view the unaudited condensed interim financial statements for the Half-year ended 1 August 2015 (PDF 906KB).
Notes to editors
The John Lewis Partnership - The John Lewis Partnership operates 44 John Lewis shops across the UK, johnlewis.com, 340 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 an employee-owned business where all 88,700 staff are Partners in the business.
Waitrose - the Nation's Favourite Supermarket¹ and winner of the Best Supermarket² and Best Food and Grocery Retailer³ awards - currently has 340 shops in England, Scotland, Wales and the Channel Islands, including 61 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 53 countries worldwide and has seven shops which operate under licence in the Middle East. Waitrose's omnichannel business includes the online grocery service, Waitrose.com, as well as direct services websites including a specialist wine website (waitrosecellar.com).
¹ Conlumino Awards, 2014
² Good Housekeeping Best Supermarket 2014, Which? Best Supermarket 2014, 2015
³ Verdict Best Food and Grocery Retailer 2015
John Lewis - John Lewis operates 44 John Lewis shops across the UK (31 department stores, 11 John Lewis at home and shops at St Pancras International and Heathrow Terminal 2) as well as johnlewis.com. John Lewis, 'Best Clothing Retailer 2015' , 'Best Electricals Retailer 2015' and 'Best Homewares Retailer 2015'4, typically stocks more than 350,000 separate lines in its department stores across fashion, home and technology. Johnlewis.com stocks over 280,000 products, and is consistently ranked one of the top online shopping destinations in the UK. 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 Verdict Consumer Satisfaction Awards 2015
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 further information please contact:
John Lewis Partnership
Andrew Moys, Director of Communications
Telephone: 07525 272377
Citigate Dewe Rogerson
Telephone: 020 7638 9571
Peter Cross, Director, Communications
Telephone: 07764 697674
Ann Bryon, Head of External Communications
Telephone: 07767 304853
Christine Watts, Communications Director
Telephone: 07764 676414
Gill Smith, Senior Manager, Corporate PR
Telephone: 07887 898133