THE YEAR AHEAD
We now have a five-year Partnership Plan. The first priority is to reduce our costs and reinvest the proceeds in improved customer service to ensure that John Lewis and Waitrose remain the go-to brands for quality, value and sustainability, with greater ease and convenience. With retail margins declining and the Partnership wishing to return more benefit to Partners, customers and communities, we are aiming that by 2030, 40% of our profits will come from areas outside retail, namely financial services, housing and outdoor living.
The outlook is uniquely uncertain as the country charts its exit from lockdown, with non-essential retail in England due to open on 12 April at the earliest; and the timetable varying in Scotland and Wales. No one has a crystal ball to predict the strength and pace of the recovery - or the future course of the virus. Our priority is to make sure that the Partnership is well placed to serve our customers, however they want to shop with us. We are expecting working from home to be at higher levels than before the crisis as more people work a ‘hybrid’ of home and office.
Many customers will have accumulated savings over the past year, having been less able to spend on holidays and going out6. This pent up demand might be spent shopping or on the experiences that they have been deprived of in the past year. Equally, with unemployment and inflation both forecast to rise7our customers may be more hesitant about spending and more cost conscious.
6 According to Bank of England data - https://www.bankofengland.co.uk/bank-overground/2020/how-has-covid-affected-household-savings
7 Office for Budget Responsibility (OBR)
Funding the Plan
We managed cash tightly through the year and intentionally slowed investment when the crisis hit to preserve cash. We also obtained new medium term bank loans of £150m, and raised £136m from the sale and leaseback of 11 Waitrose shops.
Consequently, our liquidity as of January 2021 was abnormally high with £1.5bn cash plus bank facilities of £500m. The cash balances will be required to help meet our obligations - we carry £2.1bn of total net debts (including pensions and leases), with £575m of borrowings due to be repaid in the next 4 years. They will also provide us with a buffer to withstand material volatility in trading. Managing cash prudently is particularly important for the Partnership as we cannot raise money from equity capital markets by design of our structure.
We are targeting a £300m a year cost reduction by 2022/23. Our cash position and focus on cost will allow us to fund our critical turnaround - to secure and grow the Partnership for the benefit of current and future generation of customers and Partners. We expect our liquidity levels to normalise over the medium term as we invest in our plan and repay borrowings and we will continue to manage cash tightly.
We plan to invest £800m in 2021/22 to support our turnaround, approximately 40% higher than recent years. Given this raised level of investment, we expect our financial results - including liquidity, debt ratio, and profit before exceptionals - to worsen in 2021/22 and then improve in later years.
- digital investment across both brands, at a significantly higher level than recent years;
- improvements in our store estate;
- updating of major category propositions such as Home, and refresh of financial services products such as home insurance;
- new capacity at our John Lewis Magna Park distribution site to handle a higher volume of sales during Christmas;
- restructuring to reduce costs.
We will provide an update later in the year as to how we are ensuring best value for John Lewis customers as we finalise our review of Never Knowingly Undersold, informed by intensive customer research.