^{1 Profit before Partnership Bonus, tax and exceptional items (PBTBE)}

^{2 All references to sales are Total trading sales which includes VAT, sale or return and other accounting adjustments}

^{3 We report sales using two measures: as reported and like-for-like. 'As reported' is the comparison between the statutory balances for two periods of time (e.g. this year to last year). 'Like-for-like' sales are the ‘as reported’ sales after adjustments to remove the impact of shop openings and closures and the impact of a 53rd week for 2020/21. Waitrose like-for-like sales excludes fuel. Like-for-like sales gives a better comparison of our underlying performance}

2020/21 was a 53-week year and therefore benefitted from an additional week’s trade compared to 2021/22. The impact on PBTBE is small.

A glossary of financial and non-financial terms is included on pages 13 to 15 of the full statement document.

Letter from Sharon White to Partners

 

Dear Partner,

I want to thank you for your extraordinary efforts over the past six months. Throughout the course of the pandemic, Partners have stepped up - going above and beyond to deliver exceptional service to our customers and supporting one another. 

We are in year one of our five-year Partnership Plan to return the business to sustainable profit of £400m a year, the level of profit required to meet our ambitions for customers, Partners and communities. This half year, we have had to take difficult but necessary decisions to reduce costs and improve our competitiveness. 

We have closed eight John Lewis stores and are consulting on the closure of an associated delivery hub. The number of head office roles have been reduced and we are consulting on plans to have fewer managers in John Lewis and Waitrose. This has been painful for the Partnership. Eighty per cent of affected Partners have found new roles in the Partnership in the half, while retraining support has been available to Partners to secure work outside. We are also creating new jobs: a total of 500 next year to operate our new warehouse at Fenny Lock. We have faced our biggest ever test and we will come through stronger. That is because we are a Partnership and we are invested in our collective success. 

Our financial performance in the first half year shows encouraging progress against the Partnership Plan. 

Half year results

As at full year, we report our profits using two measures - before and after exceptional items. Measuring our profits without these exceptional items gives a better indication of our underlying performance. 

For the first six months of the year, our profit before exceptional items¹ was £69m. That is £124m up on 2020/21, when the Partnership made a loss² of £55m. Last year’s results were, of course, heavily affected by the pandemic. Therefore 2019/20 is a more meaningful benchmark. Compared to the first half of 2019/20 when we made a loss² of £52m, profit is up £121m. Cost reduction is a key priority and we made savings of £66m in the first half. We received business rates relief of £58m³. 

The Partnership had exceptional costs of £98m in the half, for two main reasons. First, property costs of £24m, principally to settle lease obligations arising from John Lewis shop closures. Second, redundancy costs of £54m from restructuring, reflecting our commitment to ensure proper support for Partners leaving the Partnership. These upfront costs will help to drive an annual reduction in costs of £300m by the end of 2022/23, improving our competitiveness and freeing money to invest in growth.

Including these exceptional items, the Partnership made a loss before tax of £29m. This is a significant improvement on last year’s loss before tax of £635m, which was dominated by a write down in the value of John Lewis stores. This year is down on the first half of 2019/20 when profit before tax was £192m because of a one-off gain from the closure of the defined benefit pension scheme.
 

^{* 2019/20 is also presented due to the unusual nature of 2020/21.}

Underpinning the growth in profit was a 6% increase in sales⁴ across the Partnership. In detail:

Waitrose continued its positive momentum with 2% sales⁴ growth (like-for-like up 4%) on last year and up 10% on 2019/20. This was largely driven by online growth as we increased capacity in our shops and delivery fleet and through a new fulfilment centre in Greenford, West London, to meet rising demand. Our partnership with Deliveroo expanded from 40 to 150 shops with a potential reach of up to 13m customers. It is already generating sales of almost £1m a week and attracting younger customers. 

Online sales now stand at 17%, up from 11% a year ago but back a bit from 20% in March this year. Waitrose was the only supermarket in growth and was the fastest growing online supermarket since the pandemic began, according to Kantar⁵. Customer service remains high with Waitrose winning Grocer magazine’s Gold 33 Award. 

A combination of pandemic-related costs and growth of online has diluted operating margins. We are addressing this through investment in stock management systems, delivery charging and other efficiencies. 

We are making good progress in exploiting the potential of our two brands to work closer together giving our customers more choice. All general merchandise sold in Waitrose will be sourced by John Lewis in time for Christmas. 17 Waitrose stores now have a dedicated, redesigned John Lewis space, and that number will be approximately 40 by the end of the year. Sales in these stores are higher and customer reaction has been very positive. We are also launching joint ranges for the first time, and have begun with the Levantine Table, which brings together Waitrose food and drink with John Lewis homeware with a Middle Eastern theme. 

John Lewis saw strong sales⁴ growth in the first half: up 12% on last year (like-for-like up 13%). Pleasingly, this was slightly up by 1% on 2019/20 (like-for-like up 11%). Almost 75% of sales were online in the first half, broadly the same as last year, and significantly up on pre-pandemic levels (40%). 

Margins also rebounded strongly against last year as we returned to a more balanced pattern of trade: fewer laptops, more lamps and linen sales. Technology sales were flat year on year while growth was strong in Home (up 23%), Fashion (up 22%) and Nursery (up 18%). Compared to 2019/20, margins remained subdued as sales in lower margin categories remained higher than before the pandemic and inflationary pressures in global freight pushed up costs.

In Home, we launched ANYDAY, our new own brand that combines John Lewis’ long admired quality with style and value for money. It has been our most successful own brand launch ever for a Spring season with £56m of sales in the half. We announced plans to introduce 90 new Fashion and Beauty brands, and invested significantly in Nursery with the launch of our own brand travel range and launch of post-birth consultations.

Customers are returning to stores typically for larger, more considered purchases such as furniture and beds, and ‘take with you’ items like stationery and gifts, but so far not in the same numbers as before the pandemic. For the period that our shops were open this year, like-for-like sales⁶ compared to two years ago were around 20% lower. City centres have been harder hit than retail parks and standalone stores. John Lewis continues to rank highly with customers as the highest rated retailer in the July 2021 UK Customer Satisfaction Index.

As part of our Partnership Plan, we are seeking to grow our profits beyond retail in areas where the brand is trusted, margins are higher and customer demand is strong. Following the relaunch of home insurance and the roll out of point of sale credit for the first time online in the first half, in August John Lewis Financial Services launched its first investment products in partnership with Nutmeg, the digital wealth manager. They are particularly intended for people who are considering taking the first step into investing. 

Partnership responsibilities 

As a Partnership, we measure our success not just by our commercial performance but by the contribution we make to our Partners’ lives and to the wider community. As our commercial performance recovers, we will be able to do more on both fronts. 

Investing in our Partners: Clearly, it has been a tough year for Partners but we are also investing. From November this year, Partners will be able to take six months’ paid parental leave and time off for pregnancy loss, a benefit offered by no other retailer.  Where possible, all roles are now advertised with flexible working. In the lead up to Christmas, Partners will be able to eat for free at work and will receive a higher discount at Waitrose. We want Partners to be proud of the benefits we offer and as a Partnership we are gathering views as to how best to ensure our package remains up to date and valued. At our April pay review, the Partnership invested £54m into pay resulting in 28,000 more Partners being paid the voluntary real living wage, taking the proportion from 47% to 81%. Today, the average rate of pay for a Partner who is not a manager is now £10.32. We want to pay the voluntary real living wage to all Partners and last year pledged that we would do so when our profits recover to £200m. 

Wider community: We are cutting waste in our own operations and helping customers to do the same. From 27 September, we will no longer sell 10p bags for life in Waitrose and all online grocery deliveries will be bagless. Waitrose ‘Unpacked’ - which offers customers refillable solutions to help cut out plastics - has been expanded with 13 new lines. Over the next four years Waitrose customers will have access to 800 electric vehicle charging points in 100 of our shops through our growing collaboration with Shell. John Lewis customers can now rent over 350 furniture lines, including ANYDAY, through our tie-up with Fat Llama, and hundreds more lines will be added this month. We made £2.5m in charitable donations this half year and also launched trials with Essex County Council and The Prince’s Trust to help care leavers into employment.

Outlook 

Our focus for the second half will be execution of the Partnership Plan: delighting our customers with unrivalled products and service (online and in store) and giving them the best possible Christmas. Second half highlights include: 

• Autumn/Winter expansion of ANYDAY to include Men’s, Women’s and Children’s Fashion; 
• Relaunching the MyJL app to improve rewards for customers; 
• Expanding areas dedicated to John Lewis within Waitrose to approximately 40 shops by early 2022;
• 10 new Christmas emporiums (one-stop Christmas shops offering inspirational experiences, including in-store events and workshops) in John Lewis and over 100 new Christmas lines in Waitrose; 
• A bigger Waitrose Levantine Table range and new vegan/vegetarian own brands - Plant Life and GoVeggie.

We have begun the financial year with profits recovering, ahead of both last year and expectations set at our year end results. Traditionally, our profits are skewed to the second half of the year because of the importance of Christmas, especially in John Lewis. As we look ahead, there is significant uncertainty. Like the whole of retail, we are managing global supply chain challenges and labour shortages. We are seeing inflationary pressures, which we expect to persist. 

We are taking a raft of measures to mitigate these risks and deliver Christmas for our customers. These include a successful campaign to recruit drivers, offering competitive salaries and benefits, recruiting 7,000 temporary seasonal roles and booking additional freight to make sure John Lewis Christmas products arrive on time. 

Given the back ended nature of our trading year, we do not generally provide an outlook. And this year we face additional uncertainty. Even with the success of the vaccination programme the course of the pandemic this winter is hard to call. As we set out in March, we retained business rates relief under the original Government scheme to see the Partnership through the pandemic and avoid further job losses. We also said in March that we would keep under review whether to retain business rates relief under the extended scheme. We will take a decision at year end. 

The conditions for paying a bonus to Partners - sustainable profits of £150m and net debts of less than four times our earnings - were set by the Board in September 2020 and remain in place. The Board will take a decision on whether to award a bonus for 2021/22 in the usual way in March 2022. 

Thank you for your continued commitment to our business and to one another. We will come through stronger. 

^{1 Profit before Partnership Bonus, tax and exceptional items (PBTBE)
2 Loss before Partnership Bonus, tax and exceptional items
3 Rates relief in the half: £23m in the Government’s original scheme and £35m in the extension
4 All references to sales are total trading sales which includes VAT, sale or return and other accounting adjustments
5 Source: Kantar data March 2020 to July 2021
6 All references to sales are total trading sales which includes VAT, sale or return and other accounting adjustments}

About the John Lewis Partnership

The John Lewis Partnership owns and operates two of Britain's best-loved retail brands - John Lewis and Waitrose. Started as a radical idea nearly a century ago, the Partnership is the largest employee-owned business in the UK and amongst the largest in the world, with over 80,000 employees who are all Partners in the business. For all intents and purposes, the Partnership is a social enterprise; the profits made are reinvested into the business - for customers and Partners. John Lewis operates 34 shops plus one outlet across the UK as well as johnlewis.com. Waitrose has 331 shops in England, Scotland, Wales and the Channel Islands, including 59 convenience branches, and another 27 shops at Welcome Break locations. Our 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.

SUMMARY OF JOHN LEWIS PARTNERSHIP FINANCIAL RESULTS

 

Dear Partner,

The past year has been one of the most challenging in the Partnership’s history. The worst of times bring out the best in people and I could not be more proud of the commitment and dedication of Partners, in the most unimaginably difficult circumstances. We have come through the pandemic stronger and that is because we are a Partnership.

It’s a privilege to be a Partner in the UK’s largest employee-owned business. Employee ownership means we pull together in the good times - and in the tougher moments. You have shown extraordinary agility, creativity and adaptability as the Partnership has worked so hard to keep our customers fed and cared for through three lockdowns.

Your safety and the safety of our customers has been paramount throughout the pandemic and remains so. We were one of the first businesses to introduce social distancing - ahead of it becoming law - and an early adopter of rapid testing for Partners at scale. We are investing more in mental health support for Partners, conscious of the toll the last year has taken.

As a Partnership, it is even more important to us that in the tough times we reach out to those in our communities with the greatest needs:

• Our Give A Little Love Christmas campaign raised £3m for FareShare and Home-Start who help families at risk of food poverty and parents in need respectively; with a further £2m now pledged.
• We have set up a new programme with FareShare - Farm to Family - becoming the first UK supermarket to take surplus food straight from our largest suppliers and farms to the plates of those in need.
• We donated nearly 5,000 items of warm clothing to Home-Start to distribute to families.
• We delivered almost 2,000 care packages to over 500 NHS Hospitals and Mental Health Trusts, and another 110,000 care packages and gifts to NHS staff.
• We have given over at least a quarter of supermarket home deliveries to vulnerable customers with the figure reaching 35% in recent weeks.
• We have repurposed space at our head office in Bracknell into a vaccination centre run by the NHS and over 10,000 people have been vaccinated so far.

We were pleased to be named Supermarket of the Year by Which? in recognition of our response to Covid-19; and John Lewis was named the number one brand in the UK for the fourth consecutive year in YouGov’s Brand Rankings survey.

The climate emergency presents an even greater challenge than the pandemic, and we believe now is the time to accelerate efforts to improve sustainability. We are not perfect but we are trying hard. We became a signatory of HRH The Prince of Wales’s Terra Carta earth charter in February. In the same month, Waitrose topped Greenpeace’s annual league table as the best supermarket in tackling single use plastics, thanks in part to our Unpacked initiative. We continue to champion animal welfare standards, becoming the first retailer in the world to measure the emotional wellbeing of farm animals using a specialist mobile app.
 

OUR FINANCIAL PERFORMANCE¹

Profitability

^{1 2020/21 is a 53 week year and is reported on that basis. 2020/21 results have benefitted from an additional week’s trade compared to 2019/20. The impact on Profit before PB, tax and exceptional items is small.}

^{2 All comparatives are reported after the adoption of IFRS 16. Last year we reported alternative performance measures before IFRS 16 and our 2019/20 Profit before PB, tax, exceptionals and IFRS 16 was £123m.}

In a difficult year, the Partnership recorded a Loss before tax of £(517)m, compared to a Profit before tax of £146m in the previous year. This is the result of substantial exceptional costs of £(648)m, mainly the write down in the value of John Lewis shops owing to the pronounced shift to online, as well as restructuring and redundancy costs from store closures and changes to our head office. John Lewis shops are now held on our balance sheet at almost half the value they were before this year’s and last year’s write downs. Before the pandemic we judged that £6 in every £10 spent online with John Lewis was driven by our shops. The ratio has fallen to £3 in every £10.  

Our Profit before exceptionals was £131m. While this was up £61m on the previous year, the Partnership would have made a loss before exceptionals if it weren’t for crisis-related support from the Government. We were helped by support from the Government of £190m, which was made up of business rates relief and furlough support (the latter claimed only to July 2020). Government funding has been used for the purpose it was designed for - to protect the business - and was critical to cover the direct operational costs relating to Covid and the substantial hit to trading operating profit. The business rates relief has helped to keep us running and avoid more severe restructuring of the Partnership, which would have put more jobs at risk at a time when the high street is already under pressure. We are not out of the crisis yet and the economic environment remains extremely uncertain. Therefore, our current intention is to accept the business rates relief made available from April to June, but we will keep this under review.

Trading operating profit was significantly challenged as the improvement seen in Waitrose, in part helped by the closure of the hospitality industry, was insufficient to cover the substantial decline in John Lewis as "non-essential" physical retailing closed temporarily. However, we improved our cost base with pension costs reducing by around £55m following the closure of the Partnership's defined benefit pension scheme in April 2020. There was also an almost £25m reduction in the depreciation of John Lewis Stores - i.e. less wear and tear - owing to their significantly reduced value in our accounts through the exceptional write down.
 

^{3  The additional week in 2020/21 is estimated to inflate the reported trading operating profit for the Partnership by around £30m (Waitrose £20m and John Lewis £10m). Adjusting for this, the Partnership trading operating profit would have declined by around £(128)m.}

We entered this year with our financial performance already challenged - profits and Partner bonus having fallen for the past three years. We are having to take very difficult decisions to return the business to a path of sufficient profit of £400m by 2025/26. Last year we closed eight John Lewis stores and seven Waitrose stores that were loss making, and we are in the process of reducing the cost of our head office by 20%. We have seen limited impact from Brexit so far operationally owing to our advance preparations and the Brexit trade deal. The one area of the business that is temporarily disrupted is deliveries to Northern Ireland and we expect to resume these before the summer.

With a challenging external environment and difficult decisions as a Partnership, I could not be more proud of Partners. You have responded with exceptional agility - providing new services to customers, whose satisfaction with both brands has risen year on year. 

Laying the foundations for growth

Our rapid response to the crisis has laid the foundations of our growth:

• The benefit of being one Partnership with two brands is that more than 4,500 Partners from John Lewis were redeployed to Waitrose during the various lockdowns helping to keep the nation fed, and avoiding £15m in additional costs.
• Waitrose.com has grown fourfold since February 2020, now taking around 240,000 orders a week, and stands as a £1bn sales business. This expansion was supported by the opening of a new customer fulfilment centre in Enfield last May, and the extension of online picking and delivery, which is now available in 260 of 331 Waitrose shops. We also trebled our ‘Rapid’ delivery service within the first month of lockdown. This has all made Waitrose.com the fastest growing online retailer, growing at more than double the market rate according to Kantar.
• Johnlewis.com has grown significantly, up 73%, and this year was three quarters of the brand’s sales, from 40% before the crisis.
• Services - previously only available in-store like nursery, home interiors advice, wine tasting and cookery courses - went online, with Partners supporting customers in a personal way via Zoom and apps. A Guinness World Record was broken with the largest ever virtual beauty event masterclass with Charlotte Tilbury.
• A trial partnership with Deliveroo has attracted younger new customers and is available through 40 Waitrose shops.
• Click & Collect is now available at over 900 locations, nearly 400 of which were added in nine weeks, up from 458 last year. Purchases from Boden, Sweaty Betty and Nespresso can now be picked up through our network.
• 30 new fashion and beauty brands have been launched in store and online, with a further 50 being introduced, many of them independent and British.
• John Lewis achieved its highest ever net promoter score of 70, up 4 points year-on-year (ie many more customers recommending the brand than not), and Waitrose’s customer satisfaction score rose 5.5 percentage points to 69%.

Thanking Partners

In recognition of Partners’ hard work this past year, we introduced free food on site and raised the Waitrose shopping discount to 25% during the three lockdowns. We also made thank you payments to all non-management Partners and first level managers who worked in April and May 2020. The total cost was around £55m⁴.

We wish we were in a position to pay a bonus and it has been a very difficult decision not to. The Partnership Board believed that to do so would have held back our ability to protect the business in very difficult times and to lay the foundations to return to sustainable profit.

We are committed to restarting bonus as soon as our profits (before exceptionals) reach £150m on a sustainable basis and our debt ratio is below 4 times, and to paying the voluntary real living wage⁵ when profits rise to £200m.

^{4 Includes the total cost increase in Partner discount compared to 15% discount rate before the crisis.}

^{5 Different from the legally stipulated National Living Wage, which we already pay} 

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.

Growth plans

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.

Investments include:

• 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.

Future of John Lewis stores

As spending shifts online we want to ensure our stores reflect how customers want to shop - ‘right space, right place’.

Our shops will always be important and we are proud of our presence on the high street across the country. They provide a sensory experience that online cannot, supported by the expert advice of Partners. And both brands will remain a blend of stores and online.

We’ve undertaken substantial research into how shopping habits vary in different parts of the country and between online and stores. Customers tell us they want to shop John Lewis closer to home in more convenient locations and they want our stores to be more enticing. We will reshape our store estate over the five years of the Partnership Plan towards:

• Destination stores: showcasing our inspiring products - displaying great design with more space given over to experiences and services that cannot be found anywhere else.
• Smaller service stores: new formats of smaller, more local shops with the very best of John Lewis.
• Bringing our brands closer together: we are trialling the introduction of John Lewis shopping areas in Waitrose stores in Godalming, Horley, Wallingford, Lincoln and Lymington; the early signs are positive. If successful, we will roll out to a significant number of our 331 Waitrose shops. Our plan is for all the general merchandise in Waitrose shops to be sourced from John Lewis.
• Even greater convenience for customers: improved Click & Collect service in Waitrose stores and more local collection points through third parties like the Co-op.

All our John Lewis stores need to be exciting places to shop, more reflective of the tastes and interests of local customers. This will require investment and we are working closely with landlords and local authorities. We are keen to play our part in the revitalisation of the high street.

Hard as it is, there is no getting away from the fact that some areas can no longer profitably sustain a John Lewis store. Regrettably, we do not expect to reopen all our John Lewis shops at the end of lockdown, which will also have implications for our supply chain. We are currently in discussions with landlords and final decisions are expected by the end of March. 

Closing a store is one of the hardest decisions we can make as a Partnership. We are acutely sensitive to the impact on our Partners, customers and communities, particularly at a time when retail and our high streets are undergoing major structural change. We will do everything we can to lessen the impact and will continue to provide community funds to support local areas.

A national effort of business, local and national government, and community will be needed to address the challenges facing the high street, communities and jobless youngsters from the sheer speed at which Covid is altering the structure of the economy.

We are going through the greatest scale of change in the Partnership’s 156-year history. As employee-owners, we share the responsibility of securing the Partnership for future generations of customers and Partners. Difficult decisions taken now will hopefully set the course for those next generations.

I know I am asking so much of Partners. Retail is changing fast around us. And the Partnership is adapting just as fast. What won’t change are the principles and values in which the Partnership is rooted. We have withstood our toughest test and emerged stronger. The strength of the Partnership has seen us successfully navigate the pandemic and will see us to a successful future.
 

Sharon White
Partner & Chairman
……………………………………

The rest of this note provides more detail on our financial position over the last year and the impact of the pandemic, if you would like to read on. It is also intended as a fuller brief for those outside the Partnership who want further information about our results. 

 

About the John Lewis Partnership

The John Lewis Partnership owns and operates two of Britain's best-loved retail brands - John Lewis and Waitrose. Started as a radical idea nearly a century ago, the Partnership is the largest employee-owned business in the UK and amongst the largest in the world, with 80,000 employees who are all Partners in the business. For all intents and purposes, the Partnership is a social enterprise; the profits made are reinvested into the business - for customers and Partners. John Lewis operates 42 shops plus one outlet across the UK as well as johnlewis.com. Waitrose has 331 shops in England, Scotland, Wales and the Channel Islands, including  59 convenience branches, and another 27 shops at Welcome Break locations. The retailer's 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.

• Plan aims to see the John Lewis Partnership reach £400m profit by year 5
• Expansion of digital, virtual and delivery services to get closer to customers
• Inspirational new services and partnerships to rebalance business beyond retail
• Pledge to recruit young people coming out of the care system
• Major commitments on cutting waste and net zero carbon

Waitrose and John Lewis, two of the UK’s best loved and trusted retailers, today unveil plans to become the go-to brands for customers who want quality, value and sustainability.

Owned by the John Lewis Partnership, the UK’s largest employee-owned business, Waitrose and John Lewis are founded on being a better way of doing business. Championing equality, wellbeing and sustainability for the good of customers, Partners, suppliers and communities.

The nature of the Partnership model allows us to invest with a longer term perspective than a conventional business, even in challenging times and amidst a very uncertain economic outlook. With this in mind, our five-year plan is self-funding and takes into account uncertain trading.

The Partnership Plan sees our business continuing to adapt rapidly to changing shopping habits, getting closer to customers online and in-store. We’ll also expand in new areas where we believe our values can be a force for good.

Making value and quality more accessible

●   Affordable quality. Waitrose will continue to emphasise the value for money we offer and ensure that customers feel recognised and rewarded for shopping with us. Our Essentials range has seen sales rise by nearly 10% in the past six months. John Lewis will relaunch its Home range in the spring and introduce more affordable price points. This will reinforce fair value to broaden our appeal to more customers, recognising shoppers are especially cost conscious at the moment.

●   Digital and virtual. As shopping habits evolve, we’re bringing expert Partners and products into customers’ homes through a tap on an app. This means investing in more virtual services like personal styling, home design and the John Lewis Virtual Christmas shop.

●   Waitrose - delivered. We’ll grow delivery capacity beyond 250,000 orders per week, up from 55,000 before the pandemic, to give customers greater convenience. And we’ll save 25% of delivery slots for the vulnerable. To attract new customers, we plan more partnerships like the trial with Deliveroo, which delivers shopping in 30 minutes.

●   Inspirational new services. We’re a Partnership for positive change, improving lives and building a more sustainable future. We’ll grow in areas where these are important to our customers, like rental, recycling, savings, insurance and private rented and social housing.

More sustainable and ethical

●   Net zero carbon. Today, we’re bringing forward our ambition to be net zero carbon by 15 years to 2035. 

●   Waitrose sustainable food ambitions. We're committing to source only from net zero carbon farms in the UK by 2035. And in addition to our commitment to halve food waste in our own operations by 2030, we’re today extending this to our supply chain too. We’ll also aim to help halve our customers’ household food waste by 2030.

●   John Lewis leading the ‘made to last’ movement. We’ll do more to ensure our products can be loved for longer and today make three bold commitments: all product categories will have a ‘buy back’ or ‘take back’ solution by 2025; all key raw materials in our own-brand products will be from sustainable or recycled sources by 2025; and we’ll develop sustainable rental and resale options for customers.

●   Recruiting people from the care system. Today, we’re pledging to recruit people coming out of the care system to help them forge a career in the Partnership. We know we  must go further to better reflect the whole of the UK, and we’re taking steps to do so.

●   Real Living Wage. All profits we make are either invested back in the business or shared with Partners as co-owners of the business. Today, we are committing that when we expect to reach over £200m profit, we will pay Partners the voluntary Real Living Wage. We also aim to pay a bonus when profits exceed £150m and our debt ratio falls below 4 times.

Backed by a renewed focus on service and cost savings, the Partnership aims to see profits reach £200m in the next two years and £400m by 2025. As we’re not owned by shareholders, we can share this success with our Partners, customers, suppliers and communities.

The Partnership Plan builds on strong momentum in a tough year. We’ve tripled delivery capacity for Waitrose online to over 190,000 weekly slots in just six months. John Lewis is now a 60% online retailer, and has successfully adapted to offer many in-store services online.

Investing in the customer experience

First-class customer service delivered by Partners is our unique strength. We know it’s not always been as easy as it should be to shop with us, so we’re first investing to deliver a fantastic experience - online, on the phone and in-store.

We’re committing £1bn over five years to accelerate our online business and transform our shops. This will make it easier for customers to shop with us on our websites and apps, and provide more convenient delivery options. And we’re modernising Waitrose and John Lewis shops so we have the right space in the right place.

We’ll do this by aiming to save £300m per year by 2022, making our operations and head offices simpler and more efficient. Making these savings is crucial to free up money to invest and to deliver our plan.

Better together

Waitrose and John Lewis will work much more closely together, in store and online, bringing new inspiration and excitement to all of our customers. Already this year, our popular Waitrose Christmas hampers are available through John Lewis and our John Lewis Christmas trees will sit at the front of 300 Waitrose stores, with shoppable QR codes.

We’ll make John Lewis more accessible locally in different formats, building on significant expansion in Click & Collect. We’ll soon have 1,000 locations - through shops and collection points - to buy or pick up our products to reflect changes in how people are shopping with us.

We’re investing in data analytics and loyalty plans across our brands to reward and develop deeper relationships with our customers. Substantial customer research is under way to inform our new value pledge, which will be announced next year. Never Knowingly Undersold remains in place until then.

Our ambition for Waitrose, which was recently voted Which? 2020 UK supermarket of the year, is to be customers’ first choice for food and drink when quality, ethics and service matter. More of our business will be online, delivered and digital.

John Lewis’ focus is on meeting the needs of families with a variety of products, services and celebrations all under one roof and online. As shopping habits continue to evolve, we’ll become a 60-70% online retailer by 2025, alongside our inspiring shops.

Both brands will also add more local assortments that reflect the diversity of our customers depending on where they live.

Partnerships for growth

We’re creating partnerships to reach new customers and provide capabilities we don’t have, building on trials with Deliveroo and online furniture rental business Fat Llama. We’ll add more products to Fat Llama after all initial products were rented out.

Today, we’ve announced an additional 25 Waitrose shops that will join five other stores in the Deliveroo trial*, which is attracting new, younger customers. We’re also in discussions with Deliveroo about joint community initiatives.

Inspirational new services

After the first phase of improving customer service in our core retail business, we’re committing a total of £400m to grow in new areas where we are trusted and which fulfil customers’ needs. We’re also doing so because tightening retail margins in the long term won’t allow us to pay the wages we would like, or invest in our customers and communities. We're targeting 40% of our profits from new areas by 2030.

Financial services. We’re already successful here and the Partnership credit card is the UK’s biggest retail credit card. We’re committing £100m over five years to quadruple this business, offering new products and services like savings and insurance, where trust really matters for customers. Today, we're announcing a new partnership with four best-in-class experts to create a new home insurance product for our customers**. Customers will also be able to apply for retail credit across all our channels through a deal with BNP Paribas from early 2021.

Housing. We’ve identified 20 sites we own that could be used to benefit local communities by providing quality and sustainable housing, while providing a stable income for the Partnership. We’ll make planning applications for two of these in the new year in greater London. Entering the ‘build to rent’ market also allows us to furnish properties using John Lewis Home products and deliver Waitrose food. We’re a landlord already at three of our properties so this is an obvious extension for us. And we’re now talking to developers and investors who can help us achieve our ambitions.

Outdoor Living. We’ll start by joining up what we already do across both brands, including horticulture in Waitrose, garden furniture in John Lewis and our plant nursery, garden design and landscaping services at Longstock Park on the Waitrose Farm. We’re carrying out research to understand what customers want, and considering new partnerships and possible acquisitions.

Rental/Resale/Recycle. This is a growing priority for our customers. We’ve today set targets on being more sustainable and we have more than 20 initiatives running across our different product ranges or being developed to test with customers.  

Sharon White, Chairman of the John Lewis Partnership, said: “We’ve seen five years of change in the past five months and Waitrose and John Lewis have responded with great agility. Our plan means the John Lewis Partnership will thrive for the next century, as it has the last.”

“We’re adapting successfully to how customers want to shop today, while showing the Partnership is improving lives and building a more sustainable future. We’ll share our success with our customers, Partners - who own the business - and our communities.”

Nina Bhatia, Executive Director of Strategy & Commercial Development at the John Lewis Partnership, said: “This is a bold plan to grow our business and get us much closer to our customers. Waitrose and John Lewis are two of the country’s most trusted brands and we’ll offer the best products and customer service on the high street and online.”

“We’re creating new inspirational services for customers where strong ethical values and peace of mind matter, like reusing and recycling products, personal savings and rented housing. Our plans will firmly establish Waitrose and John Lewis as the go-to brands for customers that care about quality, value, and sustainability.”

*Deliveroo

From today, our Deliveroo trial is expanding and will be available in the following 30 shops: Bracknell, Clifton, Surbiton, Fitzroy Street (Cambridge), Notting Hill, Canary Wharf, West Hampstead, East Putney, Southampton, Clapham Common, Balham, Parkstone, Woodley, Hereford, Cheadle Hulme, Welwyn Garden City, Farnham, Byres Road, Clerkenwell, Southsea, Trinity Square, Caversham, Harborne, Solihull, Wimbledon Hill, Brighton, Bloomsbury, Winchester and Stratford City.

**Home Insurance partnership

From early 2021, we’ll be working with Munich Re’s Digital Partners, ICE Insuretech, Sedgwick, and Hood Group to deliver an innovative home insurance product.

About the John Lewis Partnership

The John Lewis Partnership owns and operates two of Britain's best-loved retail brands - John Lewis and Waitrose. Started as a radical idea nearly a century ago, the Partnership is the largest employee-owned business in the UK and amongst the largest in the world, with over 80,000 employees who are all Partners in the business. For all intents and purposes, the Partnership is a social enterprise; the profits made are reinvested into the business - for customers and Partners. John Lewis operates 42 shops plus one outlet across the UK as well as johnlewis.com. Waitrose has 335 shops in England, Scotland, Wales and the Channel Islands, including 61 convenience branches, and another 27 shops at Welcome Break locations. Waitrose exports products to more than 50 countries worldwide and has 12 shops which operate under licence in the UAE. The retailer's omni-channel 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.

Letter from Sharon White to Partners

 

Dear Partner,

I wanted to share with you the Partnership’s financial results for the first half of the year. 

I could not be more proud of how Partners have responded to the impact of the pandemic. From the initial lockdown that saw all John Lewis stores close, to surging demand in Waitrose and a huge shift to home delivery in both brands; through to the reopening of John Lewis stores; the easing of lockdown and continued focus on social distancing and other safety measures.

It was with a great deal of sadness that we took the decision not to reopen eight John Lewis stores, and plan to close three Waitrose stores at Ipswich Corn Exchange, Caldicot and Shrewsbury, while selling Waitrose Wolverhampton to Tesco. I want to pay tribute to the dedication of Partners in those stores who have served customers, their communities and the Partnership for many years. 

We will, all of us, have stories of how lockdown has affected family, friends and fellow Partners. It continues to test our physical and mental resilience. My biggest priority - always - is the safety of Partners and customers. 

Through it all Partners have day in, day out demonstrated the values of the Partnership: ‘Do right’; ‘We not me’; ‘Be yourself. Always’; ‘All or nothing’; and ‘Give more than you take’. This is shown in the fact that we:

• Served, on average, over 2.5m customers a week across John Lewis and Waitrose
• Donated 110,000 care packages and gifts to NHS staff
• Reopened our textiles factory Herbert Parkinson to make 12,000 protective gowns for the NHS
• Set aside 25% of home delivery slots for vulnerable and elderly people
• Committed £2.7m to charities and local communities, which has helped to fund food to homeless shelters and food banks.

Customer satisfaction is high in both brands, though we know we have room to improve. Waitrose has also won The Grocer magazine Store of the Week 13 times this year, more than any other supermarket.

 

Our half-year results

As a Partnership, we have the great advantage that we are able to take a long-term view. We can take the right decisions for the long-term benefit of our customers and our Partners; we can be bolder and more innovative than conventional companies, even in these challenging times. 

Constitutionally, we are required to make ‘sufficient’ not ‘maximum’ profit to invest back into the business and in our Partners. We are driven to make a difference to people’s lives and create positive social change. In that sense, we are a social enterprise. 

The pandemic has brought forward changes in consumer shopping habits which might have taken five years into five months. Both brands entered the crisis with strong and established online businesses and in the case of Waitrose, plans for expansion well underway in preparation for the end of the relationship with Ocado. Our digital businesses, powered by Partners, have been key to underpinning our first half performance.

In the first six months of this year, the Partnership made a loss¹ of £(55)m, about the same as this time last year, a creditable performance in the circumstances and ahead of expectations in our April trading update. 

Sales were a touch higher than last year - up 1%. But shoppers spent more on less profitable lines such as laptops and loo rolls. We benefited from Government support through the furlough scheme, which we exited at the end of July, and business rates, which helped to offset £50m of additional pandemic-related costs like safety equipment.

Our cash and bank facilities position - the money we have to pay our bills - is strong. At the half year, we had £2.1bn compared to £1.5bn at the start of the crisis, mainly as a result of new borrowings.

We are expecting our debt ratio - our total net debts as a proportion of our cash flow - to worsen from 3.9 times - the position in January this year. We expect it to return to under 4 times in two to three years and we continue to target a level of around 3 times in the medium term. 

In John Lewis, online sales growth was strong at 73%, helping to offset the impact of shop closures, with overall sales² down (10)% on last year.

Sales momentum is starting to build in reopened stores, with sales down around 30% on last year, ahead of expectations. Stores in retail parks are down by around 15% and are doing better than city centres, especially London which is down around 40%. Home working has had a big impact on what people are buying - more TVs and tablets, fewer trousers and trainers. 

Online now accounts for more than 60% of sales, from 40% before the pandemic. As a result of this pronounced shift to digital we had to reassess how much shops contribute to whether our customers buy online with us or not. 

Before the crisis we believed that shops contributed around £6 of every £10 spent online. We now think that figure is, on average, around £3. This has the effect of reducing the book value of John Lewis shops by about £470m, known as an ‘impairment’. This is a technical adjustment in our accounts and has no impact on our underlying profits or cash in the bank. There is some judgement here. If shops drove 10% more online sales in future, the impairment would be around £400m; 10% less and it would be around £570m. 

In Waitrose, like-for-like sales were up almost 10% on last year. The early days of stockpiling pasta and long life milk have given way to a varied basket with more fresh produce and a return to the weekly shop. Demand for online shopping remains strong and we are now delivering around 170,000 weekly orders, up from around 60,000 before the pandemic. The average basket size is four times bigger for home deliveries than in store. 

 

LOOKING AHEAD TO THE SECOND HALF OF THE YEAR

Early weeks of trading have been encouraging in both brands. In John Lewis our new Home collection has launched and a bigger revamp for this key category is set for next spring. Services previously only available in store - personal and home styling, beauty and nursery advice - can now be accessed online as well and take-up is high.

Waitrose has seen a strong pick-up in demand since the end of our relationship with Ocado on 1 September. Waitrose.com orders were up 9% in the first week. Waitrose.com is now a £1bn annualised business and we will further expand capacity by around 50% to 250,000 orders a week. We have also entered into a trial partnership with Deliveroo, which has seen very positive early results. Up to 500,000 customers in five areas can now get 30 minute deliveries, with plans to add 25 more localities. 

With the whole country having had such a challenging year, we want to help families to celebrate their best Christmas (or other festivals this winter that may be special to them). John Lewis opened its Christmas shop early this year. Sales of Christmas trees and baubles are both markedly up on last year. Alongside our Essential range, which features items such as our whole turkey and shortcrust mince pies, Waitrose is launching 350 new own-brand foods for Christmas - from No.1 British Venison Wellington and Heston from Waitrose Chocolate Bucks Fizz Candles.

The outlook for the second half is clearly uncertain given the broader macroeconomy. Christmas trade is also particularly important to profits in John Lewis and I would ask Partners to do everything we can to serve customers brilliantly both in John Lewis and Waitrose. In April, we set out a worst case scenario for the full year of a sales fall of 5% in Waitrose and 35% in John Lewis. That remains our worst case view. We now believe the most likely outcome will be a small loss or a small profit for the year. As I have mentioned previously, we are targeting £100m head office savings, and we are aiming to make these savings as early as possible this financial year and next.

 

IMPLICATIONS FOR BONUS

I said to Partners in April that I could not see the circumstances in which we would be able to pay a bonus next March. The Partnership Board has now confirmed that there will not be a bonus next year given our profit outlook. 

I know this will come as a blow to Partners who have worked so hard this year. The decision in no way detracts from the commitment and dedication that you have shown. 

Outside of exceptional circumstances, we would now expect to begin paying a bonus again once our profits exceed £150m and our debt ratio falls below 4 times. Once our profits rise above £300m and a debt ratio below 3 times, we would expect to pay a bonus of at least 10%. 

The Partnership found itself in a similar position in 1948 when the bonus was halted following the Second World War. We came through then to be even stronger than before and we will do so again. 

 

STRATEGY REVIEW OF THE PARTNERSHIP

We are making good progress with our strategic review of the Partnership, which aims to recover profitability over the next three to five years.

We are advancing plans for how we will:

• modernise our purpose, making it even more relevant for customers,
• simplify how we work and reduce costs,
• become a stronger retailer with more focus on digital,
• broaden our financial services and expand into more services such as rent, reuse and recycle, housing and outdoor living,
• grow through partnerships with those who respect our ethos.

The new strategy is already taking shape and we will set out more details for Partners in October.

We should be confident about our future. We have two of the best loved brands on the high street. Purpose is fundamental to everything we do and believe in - tackling inequality, improving sustainability and wellbeing - at a time when customers are more thoughtful than ever before about what they buy and who they buy with. 

Thank you for everything you are doing. It is a privilege to be a Partner.

^{1 Loss before Partnership Bonus, tax and exceptional items
2 Total trading sales}

FINANCIAL OVERVIEW

^{3 Total trading sales represents the full customer sales value, including VAT, that is used to assess ongoing sales performance. It is before adjustments for sale or return sales and other accounting adjustments.
4 Trading operating profit represents operating profits used to assess the performance of the John Lewis and Waitrose brands and determine the allocation of resources to them. It excludes centrally managed costs, including fixed property costs and depreciation.}

Our first half performance includes Government support of £55m of furlough money and £51m from the business rates holiday. This was set against lost trade from the closure of our John Lewis shops, which we estimate is over £200m of sales, as well as additional costs related to the pandemic of around £50m, including the cost of providing safety equipment, extra donations to charities and local communities, and increased benefits to Partners. 

ADDITIONAL FINANCIAL INFORMATION

^{Note (i) Waitrose like-for-like sales excludes fuel} 
 

EXCEPTIONAL ITEMS

Exceptional costs totalled £(580)m (2019/20: exceptional income of £244m). Further details are included in the following table:

Further details explaining each of the exceptional items is included within the full report below.

NET FINANCE COSTS

Net finance costs decreased by £11m to £77m, principally driven by:

• lower long leave financing costs due to less volatility in the market driven assumptions related to our long leave Partner scheme                                compared to last year.
• reduced interest costs on borrowings.

About the John Lewis Partnership

The John Lewis Partnership owns and operates two of Britain's best-loved retail brands - John Lewis and Waitrose. Started as a radical idea nearly a century ago, the Partnership is the largest employee-owned business in the UK and amongst the largest in the world, with over 80,000 employees who are all Partners in the business. For all intents and purposes, the Partnership is a social enterprise; the profits made are reinvested into the business - for customers and Partners. John Lewis operates 42 shops plus one outlet across the UK as well as johnlewis.com. Waitrose has 335 shops in England, Scotland, Wales and the Channel Islands, including 61 convenience branches, and another 27 shops at Welcome Break locations. Waitrose exports products to more than 50 countries worldwide and has 12 shops which operate under licence in the UAE. The retailer's omni-channel 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.

Dear Partner,

I wanted to thank you for your extraordinary commitment and professionalism during the pandemic.  Your support to each other, to customers and to the community has been inspiring and humbling. The Partnership has come together in a wonderful way, with thousands of John Lewis Partners supporting Waitrose. 

Today we are publishing our Annual Report and Accounts, which sets out the Partnership’s financial performance for last year. The Partnership is to all intents and purposes a social enterprise. We prioritise customers and Partners ahead of profit. We aim to make sufficient profit to invest in customers and Partners, not the maximum amount possible.

I wrote to you with the highlights of last year’s financial performance when I announced the bonus decision in March. With the outbreak of COVID-19, I wanted to give you the latest picture on our trading performance. I also wanted to say more about how we are supporting customers, Partners, suppliers, and our communities at this time of national emergency.

This is a time of great uncertainty and volatility and the full year picture is impossible to predict. We are therefore looking at a range of different possible outcomes and how these might affect profits, sales and cash flow.

We are confident that the future of the business is strong. Our short term trading has though been significantly affected, principally because of the closure of all 50 John Lewis branches. John Lewis online remains open - providing essential goods and services to enable customers to live well at home - and online sales are substantially up on last year. But it has not been enough to offset the loss of shop trade. Demand at Waitrose has risen sharply but operating costs have increased too, especially as we have expanded online delivery.

Prioritising safety

The safety of our customers and Partners is our absolute priority. In our shops we have put in place checkout screens; raised the contactless payment limit to £45; introduced floor markers to support social distancing. In our warehouses and distribution we are operating social distancing and maintaining high health and safety standards. We are working round the clock to ensure Partners have all the personal protection equipment you need.

Supporting Partners

Partners are daily making significant personal sacrifices. All non-management Partners and first level managers will receive a one off award of £200. Partners who have been furloughed largely as a result of the closure of John Lewis shops, will receive full contractual pay until the end of May.

Supporting the community and our suppliers

As a Partnership we have a particular responsibility to support those in the greatest need. We have created a wellbeing area for NHS staff at the Nightingale Hospital in London, and are looking to do similar in Birmingham. With the British Medical Association we are providing boxes containing essentials such as toiletries, snack food, tea, coffee and socks for NHS workers. We have also given NHS staff priority service in our Waitrose shops.

We are also supporting elderly and vulnerable customers, with the first shopping hour of the day given over to them and one quarter of our online slots reserved for them. I know many more customers would like home delivery than we can cater for and this has caused understandable frustration. We also have set up a £1m fund to support vulnerable members of the local community, including schools for the children of key workers.

These are difficult times for suppliers. We are sticking by our commitment to pay our smaller food suppliers with a turnover below £100,000 within seven days. And we are donating £200,000 from the Waitrose charitable foundation to support overseas farmers.

Trading

The pandemic has significantly changed the trading patterns in both brands. In Waitrose, we have seen strong sales growth up 8% year-on-year since 26 January. Items in highest demand have been cupboard essentials like rice, pasta, long life milk; home baking; frozen foods and cleaning products. Sales have increased in both our shops and online. Demand for home delivery has been especially strong and we have increased our capacity by 50%, which puts us in good stead ahead of the ending of the Ocado contract in September.

In John Lewis, trading has been mixed. With stores closed, we have seen a significant spike in our online sales which are up 84% year-on-year since the middle of March. The highest demand has been in areas linked to working and living at home like technology and food preparation but also in looking after and entertaining our children and keeping fit. However, these are some of our less profitable lines. We are buying more Scrabble but fewer sofas. Overall, John Lewis sales are down 17% year-on-year since the middle of March, and down 7% year-on-year since 26 January.

Our worst case scenario for the full year assumes significant sales decline between April and June, and weak sales thereafter. Over the course of the full year, this worst case would result in a sales decline of around 35% in John Lewis, around double the current level, while at Waitrose it would result in a more modest decline of less than 5%.

Cash and liquidity

We started the financial year with just over £900m cash and investments in the bank and with access to a further £500m of undrawn committed bank facilities. Six weeks into the crisis, we are holding broadly the same level of cash and investments. But with such unprecedented trading volatility we have a range of actions that we are ready to take to secure the financial sustainability of the Partnership.

The Government has introduced a 12-month business rates holiday for England and Scotland. This will save the Partnership around £135m this financial year. The Government has also deferred payment of VAT until March 2021, which will help our short term cash flow.

The Board has already taken a number of steps to preserve liquidity. These include:

-        Lowering our planned stock intake in line with our slower trading in John Lewis.

-        Reducing operating costs, including cutting back on our marketing spend by close to £100m.

-        Minimising capital and investment commitments: Our capital and investment spend for 2020/21 will be over £200m less than originally planned.

-        Furloughing more than 14,000 Partners whose jobs are temporarily no longer supported by the business.

-        Negotiating with landlords regarding rent relief, including an immediate switch to monthly from quarterly payments.

-        Working with our banking partners to consider how extra flexibility can be provided, should it be needed.

In addition, the Executive Team, Non Executive Directors of the Partnership Board, the Independent Directors and I will be taking a 20% cut in pay from April, initially for three months.

With these actions and continued close attention, I am confident that we have sufficient cash to operate successfully through a broad range of potential scenarios.

Emerging stronger from the crisis

I announced in March that we will be undertaking a Strategic Review of the Partnership, to strengthen our core retail business and develop new services outside retail. The review will now be accelerated and will be substantially complete by the summer. It will seek to take account of changes in consumer behaviour to come out of the pandemic, such as a more pronounced shift to online and a desire to shop in more sustainable ways.

The Partnership has been trading for nearly a century. It has survived a world war and bombings, economic crashes and crises. Thanks to you, we shall also come through COVID-19 too and emerge stronger. 

Sharon White
Partner & Chairman

About the John Lewis Partnership

The John Lewis Partnership owns and operates two of Britain's best-loved retail brands - John Lewis & Partners and Waitrose & Partners. Started as a radical idea nearly a century ago, the Partnership is the largest employee-owned business in the UK and amongst the largest in the world, with over 80,000 employees who are all Partners in the business. For all intents and purposes, the Partnership is a social enterprise; the profits made are reinvested into the business - for customers and Partners. John Lewis & Partners operates 50 shops across the UK (36 department stores, 12 John Lewis at home and shops at St Pancras International and Heathrow Terminal 2) as well as johnlewis.com. Waitrose & Partners has 338 shops in England, Scotland, Wales and the Channel Islands, including 61 convenience branches, and another 27 shops at Welcome Break locations. Waitrose & Partners exports products to more than 50 countries worldwide and has nine shops which operate under licence in the Middle East. The retailer's 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. Our food business is bigger than our non-food business and our John Lewis shop sales represent less than a quarter of the Partnership’s total revenue.

LETTER FROM SHARON WHITE TO PARTNERS

Dear Partner,

I am writing to you today as a fellow co-owner of the John Lewis Partnership to share our financial results for 2019/20.

We are the largest employee-owned business in the UK and amongst the largest in the world. We are to all intents and purposes a social enterprise; the profits that we make are reinvested into the business - for our customers and our Partners.

Our constitution requires us to make sufficient profit to keep the Partnership going, not the highest amount possible, and to put our customers and our Partners ahead of profit.

Throughout 2019 Partners right across the business have shown incredible passion for and commitment to our customers, and continue to do so. I have seen this first hand in all the visits I have made since I became Chairman - from our contact centre in Hamilton to our textile mill at Herbert Parkinson; from our distribution centre at Magna Park to our Waitrose store in Mill Hill.
 

FINANCIAL PERFORMANCE AND BONUS

With the hard work of Partners, we made £123m of profit¹ in 2019/20, which is 23% less than we made in 2018/19. This is a weaker performance than we had hoped for, driven by significantly reduced profitability in John Lewis. Despite a solid performance in Waitrose, it is our third year of declining profit across the Partnership as a whole. This year we saw a one-off reduction in the value of our John Lewis shops of £123m, principally as a result of shops playing less of a role in driving online purchases. 

Profits in 2019/20 were at the lower end of what we had forecast. We are, therefore, awarding a bonus this year of 2%. I believe this is prudent and affordable and it recognises the contribution made by Partners working in the business today without creating risk for our future sustainability. The result is that we are able to continue to invest in our customers and pay down more of our debt - this year our total net debts has fallen as a ratio of cash flow from 4.3 to 3.9 times.
 

THE PARTNERSHIP’S STRENGTHS

We have considerable strengths as a business:

• We have passionate and committed Partners who have huge creativity and innovation.
• We have two of the best loved brands among UK customers. Waitrose is the Which? supermarket of the year² and John Lewis recently topped a YouGov poll³ for the high street’s most recommended brand.
• We are a ‘purpose-led’ business that aims to put people and the planet before profit. We do not make out to be perfect but we do seek to take an ethical approach to business and help our customers to shop more sustainably.
• Our co-ownership model means we can invest for the long-term benefit of our customers.  

Looking back on the last year, I am particularly proud of the investment we make each year in community and environmental projects. Examples include our ‘Unpacked’ trial that reduces the amount of plastics used for fresh food and staples in our Waitrose shops, which we will be extending this year, and our partnership with the charity Fareshare that gave festive meals to more than 1,500 people who might otherwise have gone without.
 

PRIORITIES FOR THE YEAR AHEAD

There are areas of the business where we know we need to serve customers better. In John Lewis we will be refreshing our home offering, introducing more inspirational and contemporary ranges with improved pricing and delivery. We will also be making improvements to John Lewis online to make it easier to shop.

We will be investing significantly in Waitrose.com, ahead of our partnership with Ocado ending in September. Sales growth through Waitrose.com was 13% up in 2019/20. We are also recruiting 2,400 new Partners and building a new fulfilment centre in Enfield to meet increased demand for Waitrose products online.

All of us are aware of the challenges in retail. New technology means that shoppers have never had so much choice, value and convenience. That is to be celebrated. And there is great opportunity for retailers who have an intimate understanding of their customers to respond to them in an agile fashion. Every Partner can make a difference this year by focusing relentlessly on service - wherever they are in the business. If we get it right, customers will return to shop with us and we’ll earn their lifelong loyalty. 

Future Partnership will slim down our head office functions and promote closer working between Partners in Waitrose and John Lewis. It will cut costs and over time make it easier for customers to shop across the two brands. As we restructure, we will take care not to lose the distinctive nature of the two brands.
 

STRATEGIC REVIEW

We need to reverse our profit decline and return to growth so that we can invest more in our customers and in our Partners. This will require a transformation in how we operate as a Partnership and could take three to five years to show results. We are stepping into a vital new phase for the Partnership and I have no doubt we will come through it stronger.

Last month I spoke at Partnership Council about the Strategic Review of the Partnership that we are now launching. The review is being led by the executive team but all Partners - those of us who are active in the democracy and those who are not - will have the chance to contribute and shape our future. Further details will follow.

The Strategic Review will focus on how we strengthen our core retail business and develop new services outside retail. As part of this we will also look at ‘right sizing’ our store estate across both brands, through a combination of new formats and new locations; repurposing and space reductions of existing stores; and closures, where necessary. Over the last few years we have reviewed Waitrose stores that were no longer viable and today we are announcing three Waitrose stores that will close later this year at Helensburgh, Four Oaks and Waterlooville. These decisions are never taken lightly and every Partner who wishes to stay in the Partnership will be actively supported to do so.

At the outset of the Strategic Review I want to make clear that we will:

• Continue to be an employee-owned Partnership.
• Retain our two brands - John Lewis and Waitrose.
• Put exceptional customer service at the heart of what we do - whether in store, online or in customers’ homes.
• Focus on quality and value, with Partners empowered to offer products and services that are more local.
• Put even greater emphasis on sustainability. 

The Strategic Review will be completed by the autumn and we will give a further update with our half year results. At the end of the review every Partner will be clear on the concrete plan and what the future means for their area and for the Partnership. 

These are the most challenging but exciting times in retail for a generation. Together we have the opportunity to secure the Partnership not just for the next five years but for the next 100.

Best wishes

^{1 Profit before Partnership Bonus, tax, exceptional items and IFRS 16
2 Which? annual supermarket survey - Published 22 February 2020
3 YouGov High Street Recommended Rankings - Published 19 February 2020}

FINANCIAL OVERVIEW

^{Throughout this document, alternative performance measures related to profit for 2019/20 are presented before IFRS 16 adjustments related to depreciation expenses on right-of-use assets and, where relevant, interest charges on lease liabilities, and before the removal of operating lease rental expenses. This is to provide a more meaningful comparison to 2018/19. A glossary of financial and non-financial terms is included on pages 7-11 of this document.}

Our Partnership profit before Bonus, tax, exceptionals and IFRS 16 was £123m, a weaker performance than we had hoped for, driven by significant operating profit decline in John Lewis, which was partly offset by operating profit growth in Waitrose, and lower net Group costs and finance costs.

John Lewis operating profits before exceptionals and IFRS 16 were down £75m to £40m, driven by weaker sales in Home and Electricals, IT investment to enable accelerated development of our customer proposition, and growth in non-management Partner pay well ahead of inflation, which was only partly offset by productivity improvements.

Waitrose operating profits before exceptionals and IFRS 16 grew by £10m to £213m. After excluding property profits of £16m (2018/19: £nil), it was down £6m, with the improvement in gross margins and a strong operational performance being offset by cost inflation, including investment in non-management Partner pay.

This year we adopted IFRS 16, the new accounting standard for leases, using the modified retrospective approach on transition. Our last year results are therefore not restated. Whilst IFRS 16 has decreased our reported Profit before tax by £53m, primarily due to the length of our lease portfolio, it does not change the underlying economics of our business and it has no impact on cash flows. Further details of the impact of IFRS 16 were included in our half-year results statement issued in September 2019.

After including exceptional income of £107m (2018/19: £2m), Partnership Bonus and the charge for adopting IFRS 16, our Profit before tax was £146m, up £29m or 25% on last year. Further details of exceptional items are included on pages 5-6.

Continued cash generation alongside our decision to close our final salary defined benefit pension scheme, enabled us to reduce total net debts by more than £230m. Our Debt Ratio improved to 3.9 times and we remain on track to reduce it to around three times cash flow within four years. We have also maintained a strong liquidity position at over £1.4bn, despite repaying our £275m bond in April 2019.
 

OUTLOOK

We are confident that our new products and services and focus on outstanding customer service will reinforce the strength of our brands. We are planning for the market to remain volatile, but expect continued cash generation, allowing us to further strengthen our balance sheet and maintain our level of investment.
 

ADDITIONAL FINANCIAL INFORMATION

^{Note (i) Waitrose like-for-like sales excludes fuel (ii) Operating profit/(loss) before PB is after including exceptional items and the adjustment for IFRS 16}
 

EXCEPTIONAL ITEMS

Exceptional income totalled £107.4m (2018/19: £2.1m) with £30.6m charge in Waitrose (2018/19: £4.0m), £101.0m charge in John Lewis (2018/19: £22.1m) and £239.0m income in Group (2018/19: £28.2m). Further detail is included in the following table:

a) Net charge of £63.7m (2018/19: £31.1m) for redundancy costs, project costs, onerous contract, asset impairments, accelerated depreciation and closure costs in relation to either the transformation of pan-Partnership functions and other head office operations, the programme of optimising our existing estate, or the review of our shop operating models.
(b) In 2017/18 a charge of £35.7m was recognised for branch impairments in Waitrose. A credit of £13.3m has been released as a result of improved branch performance.
(c) Net charge of £110.3m in relation to a £122.9m charge for branch impairments in John Lewis, principally reflecting a reassessment of the role that shops play in driving online purchases, and a credit of £12.6m for the release of an impairment charge previously recognised in 2018/19.
(d) Net income of £9.1m principally in relation to the disposal of a property as part of the John Lewis supply chain restructure.
(e) In 2018/19 there was a release of £30.3m following rectification payments and discussions with HMRC, from a provision recorded in 2016/17 to cover the potential costs of complying with the National Minimum Wage Regulations. 
(f) Income of £249.0m for the reduction in pension obligations following the decision to close the defined benefit pension scheme. This removed the future link with final salary and instead increases in future pensions up to retirement will be in line with inflation.
(g) Income of £10.0m (2018/19: £15.0m) following the Partnership reaching a settlement in relation to an ongoing legal dispute.

Further disclosure of exceptional items will be included in the Annual Report and Accounts 2020 which will be published in April.
 

NET FINANCE COSTS

Net finance costs increased by £94.6m to £161.6m, principally due to the interest charge on outstanding lease liabilities following the adoption of IFRS 16 this year. Excluding the impact of IFRS 16, net finance costs reduced by £8.9m to £58.1m. This reduction is principally driven by reduced interest costs on borrowings following the repayment of financial debt and reduced pension finance costs due to a lower pension accounting deficit at the beginning of the year compared to the beginning of the previous year, partly offset by higher long leave finance costs arising from volatility in market driven assumptions.
 

About the John Lewis Partnership

The John Lewis Partnership owns and operates two of Britain's best-loved retail brands - John Lewis & Partners and Waitrose & Partners. Started as a radical idea nearly a century ago, the Partnership is the largest employee-owned business in the UK and amongst the largest in the world, with over 80,000 employees who are all Partners in the business. For all intents and purposes, the Partnership is a social enterprise; the profits made are reinvested into the business - for customers and Partners. John Lewis & Partners operates 50 shops across the UK (36 department stores, 12 John Lewis at home and shops at St Pancras International and Heathrow Terminal 2) as well as johnlewis.com. Waitrose & Partners has 338 shops in England, Scotland, Wales and the Channel Islands, including 61 convenience branches, and another 27 shops at Welcome Break locations. Waitrose & Partners exports products to more than 50 countries worldwide and has nine shops which operate under licence in the Middle East. The retailer's 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.    

TRADING SUMMARY

• Gross sales at the John Lewis Partnership were down 1.8% versus last year¹ to £2,167m.
• Waitrose & Partners gross sales (excluding fuel) were £1,033m, down 1.3% versus last year (due to shop closures) but up 0.4% on a like-for-like basis.
• John Lewis & Partners gross sales were £1,134m, down 2.3% versus last year and down 2.0% on a like-for-like basis.
• Waitrose & Partners online sales increased by 16.7% and in the seven days to Christmas online grocery orders were up 23.4%. John Lewis & Partners online sales increased by 1.4%. 

Sir Charlie Mayfield, Chairman of the John Lewis Partnership, said: “We saw a good sales performance in Waitrose & Partners, despite a weak grocery market, with like-for-like sales up 0.4%. In John Lewis & Partners like-for-like sales were 2.0% down on last year. Operationally - across availability, service, delivery and online - we saw a strong performance in both brands.

In John Lewis & Partners, Beauty sales were up 4.7%, comfortably ahead of the market, with overall Fashion sales up 0.1%. Home sales were down 3.4% and Electricals & Home Technology sales were down 4.0%. We saw significant variation in levels of demand with Black Friday sales up 10.0% on the equivalent period last year, followed by more subdued demand in the subsequent weeks.

In Waitrose & Partners we saw encouraging progress against our milestones to accelerate growth online next year, with a 23.4% increase in orders and an increase in basket sizes in the seven days to Christmas.

At the full year, we expect profits in Waitrose & Partners to be broadly in line with last year. In John Lewis & Partners we will reverse the losses incurred in the first half of the year, but profits will be substantially down on last year. We therefore expect that Partnership profit before exceptionals will be significantly lower than last year. Our balance sheet and liquidity position are strong and we expect to improve our Debt Ratio².

The Partnership Board will meet in February to decide whether it is prudent to pay a Partnership Bonus. The decision will be influenced by our level of profitability, planned investment and maintaining the strength of our balance sheet.”

^{1  Last year was seven weeks 18 November 2018 to 5 January 2019.
2  Subject to interest rate movements that may affect our year-end pension deficit.}

FUTURE PARTNERSHIP

Last October we announced bold changes to the way the Partnership will be led in future. Known as the Future Partnership plan, it integrates the teams behind our two brands under one new Executive team structure. Good progress has been made in implementing that structure, with more than 90% of leadership appointments now confirmed. 

We are announcing today that Paula Nickolds, currently the Managing Director of John Lewis & Partners, will step down from the Board and will be leaving the Partnership in February 2020.

Paula has been with the Partnership for 25 years and has been an outstanding Partner and leader throughout her time. She has played a central role in the development of John Lewis & Partners over the last 10 years in a variety of senior positions. After some reflection on the responsibilities of her proposed new role, we have decided together that the implementation of the Future Partnership structure in February is the right time for her to move on and she will leave the Partnership with our gratitude and best wishes for the future.

Future Partnership will be in place from the start of February, when Sharon White will become the Partnership’s sixth Chairman.

ABOUT THE JOHN LEWIS PARTNERSHIP

The John Lewis Partnership owns and operates two of Britain's best-loved retail brands - John Lewis & Partners and Waitrose & Partners. Started as a radical idea nearly a century ago, the Partnership is now the largest employee-owned business in the UK, with more than 80,000 employees who are all Partners in the business and share in its profits. The Partnership operates on strong democratic principles, which means that every Partner has a say in how the organisation is run. The business has annual gross sales of over £11.7bn, 388 shops and a leading online business. Its commercial strategy is focused on differentiation rather than scale, through investment in innovation and Partner-led service.

ABOUT JOHN LEWIS & PARTNERS

John Lewis & Partners operates 50 shops across the UK (36 department stores, 12 John Lewis at home and shops at St Pancras International and Heathrow Terminal 2) as well as johnlewis.com. In the changing world of retail, John Lewis is focused on competing through differentiation and innovation in three key areas - unique own brand and exclusive products that customers cannot buy anywhere else, exceptional Partner-centric service and experiences, and its expanding range of financial and home services that wrap around everything it sells. John Lewis & Partners won Best Retailer, Best Electricals Retailer, Best Homewares Retailer and Best Furniture Retailer at the GlobalData Customer Satisfaction Awards 2019, and its Westfield White City shop won Best New Store at the Retail Week Awards 2019. 

ABOUT WAITROSE & PARTNERS

Waitrose & Partners has 338 shops in England, Scotland, Wales and the Channel Islands, including 61 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 is an employee-owned business - all employees are Partners and have a say in how the business is run. Waitrose & Partners exports products to more than 50 countries worldwide and has eleven shops which operate under licence in the Middle East. The retailer's 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.

Sir Charlie Mayfield, Partner and Chairman of the John Lewis Partnership, commented: “In line with expectations set out in June, our Partnership profits before exceptionals have finished substantially lower in what has been a challenging year, particularly in non-food. Operating profit recovered strongly in Waitrose & Partners, up 18% (to £203.2m), mainly due to improved gross margins. However, it was down sharply, by 56% (to £114.7m), in John Lewis & Partners because of weaker Home sales, gross margin pressure, higher IT costs, the property impact of new shops and lower profit on asset sales. Despite this, we managed cash tightly and reduced total net debts by £401.3m.

This is part of our strategy to build up our cash reserves as a defence against uncertainty in the economy and to enable us to maintain annual investment at £400m-£500m per year. We have also made significant investment in our Partners during the year, particularly in leadership development, apprenticeships and pay, with our average hourly rate for non-management Partners rising to £9.16, 17.0% above the National Living Wage. We expect that average hourly rate of pay to increase by around 4.5% following our April 2019 pay review.

While Partnership profits were down, there were several areas where we have seen performance move forward, particularly in areas where we have invested. In John Lewis & Partners the launch of our own-brand Womenswear and expansion of personal styling offer has driven strong sales growth in Fashion, growing market share significantly. In addition, the investment in front line service delivered best ever customer experience ratings in John Lewis & Partners. In Waitrose & Partners, significant investment in Waitrose.com, new customer smartphone apps and customer delivery services has led to a strong increase in online grocery sales of 14%, well ahead of the market, and increased online customer satisfaction.

The Board has awarded a Bonus at 3%. This enables us to continue debt reduction, maintain our level of investment and retains solid cash reserves to cope with the continuing uncertainty facing consumers and the economy. We expect 2019 trading conditions to remain challenging but are confident in our strategic direction and customer offer across both brands.”

The market context continues to be challenging. That’s evident in our results, especially in John Lewis & Partners, where we saw near constant discounting across many categories from October onwards in response to the combination of subdued demand, excess retail space and some other retailers’ distress.

As a result, sales in John Lewis & Partners were up 0.7% (down 1.4% like-for-like). Weaker Home sales combined with gross margin pressures drove around half of the reduction in profits, with the remainder largely due to additional IT costs and property related items.

In Waitrose & Partners we saw a 18% rebound in profits. This was driven by like-for-like sales growth of 1.3% and improved gross margin, which benefited from 24 range reviews, as well as stronger operational performance and well controlled costs, especially in the second half year.

Near-term uncertainty, politically and in the economy, is having a major impact on consumer confidence, but we do not believe the market conditions are cyclical. The disruption we have seen on the High Street, including business failures and renewed interest in mergers and acquisitions, are instead signs of an inevitable market adjustment which will require greater clarity on whether brands are competing on scale or difference.

The answer for the Partnership is clear and, despite tough conditions and lower profits, this has been a year when we have developed our brands and invested in Partners. Our difference comes from our people, and the energy, commitment and personality they bring to delivering excellent customer service and high quality products to our customers. This is signalled in our rebranding and is why we have stepped up investment so significantly in training and capability building.

In John Lewis & Partners our strongest sales growth came in areas where we have made the greatest investments in new product and services. Our full range relaunch of own-brand Womenswear, including new product, in-store concept and enhanced Partner training, delivered sales growth of 12.9%, and the expansion of our own-brand electricals range resulted in sales up 11.2%. In the year ahead our furniture assortment and Menswear collections will be completely relaunched.

In Waitrose & Partners we launched more than 5,000 new or updated products including extensive ranges of vegetarian and vegan products. We completed 24 range reviews from breakfast cereals and sliced bread to meat and fish counters, removing duplication, making the offer clearer for customers and increasing our difference versus competitors. We are also on track to phase out black plastic from our own-brand packaging by the end of 2019 and have brought forward our target to make all our own-brand packaging widely recyclable, reusable or home compostable from 2025 to 2023. In addition, the Waitrose & Partners Foundation, which was set up to improve the lives of the people who grow, pick and pack our fresh produce and their communities, now operates in seven countries, having recently expanded to Costa Rica, Senegal and The Gambia.

In the year we stepped up our service difference. We made several improvements to convenience, with shorter delivery windows and live order tracking in John Lewis & Partners, opening of additional delivery slots and trials of a rapid delivery service in Waitrose & Partners, and trials of in-home services across both brands. We have also introduced several added value services including Personal Styling and Beauty Studios in John Lewis & Partners and more Healthy Eating specialists and a new service ambassador role in Waitrose & Partners. We achieved our highest ever levels of customer experience ratings in John Lewis & Partners. Our focus on customer service in Waitrose & Partners was recognised by Which? with the publication giving it the top position in its 2019 supermarket survey.

Greater investment in our Partners was key to this. We invested significantly in leadership development, for over 250 of our most senior leaders, and will extend that to many more this year. We expanded our apprenticeship programme, with over 900 apprentices enrolling in the year in areas such as retail, LGV driving, vehicle maintenance, hospitality, human resources, project management and finance. We made some of these ‘open entry’ to enable Partners to apply from any part of our business. Among the apprentices that have completed their programmes in the year, 65% passed with distinction where that was an achievable grade. We have taken significant steps in our aim to be the UK’s Healthiest Employer with a review of our Partner dining rooms, including the food and drink we serve, and launching a Wellbeing Champions Network with more than 430 Partners now recruited in more than 130 locations across the country. Partners have accessed our market-leading mental and physical health support services to either prevent health issues or promote quicker recovery, saving more than 60,000 working days across the year. As we have sought to create jobs with more opportunities for Partners to contribute more value through greater use of skills, expertise and judgement, we have increased pay for non-management Partners, with the average hourly rate of base pay rising to £9.16, which is 17%, above the National Living Wage. We expect that average hourly rate of pay to increase by around 4.5% following our April 2019 pay review.

To deliver the level of distinctive difference and innovation we need for the future requires annual investment of £400m-£500m. We anticipated five years ago that market conditions would worsen and took a series of connected steps to strengthen our financial reserves to enable continued investment at this level despite lower profits. These included changes to our pension benefit in 2014, deprioritising investment in new physical space from 2015, and halving the rate of bonus distribution in 2016. We have made a number of divestments of shops and assets in the year and yesterday we also informed Partners that five further Waitrose & Partners shops will be sold to other retailers. We have also made significant organisational changes including moving to single Partnership support functions in many areas. Partner numbers have reduced from 93,800 in January 2015 to 83,900 in January 2019. We will take a series of further steps this year in the move to an even more productive ‘one Partnership’ approach.

In response to the current economic uncertainty, we have built up a strong liquidity position at nearly £1.5bn which is almost double the level five years ago, despite having made deficit reduction contributions of more than £250m to our pension fund over the last three years, which was nearly 97% funded on an actuarial funding basis at January 2019. We have reduced total net debts by over £400m in the year and will pay, from cash, a further £275m to redeem a bond that matures in April 2019.

The decision to pay a Bonus at 3% reflects our continued commitment to sharing a proportion of profits with Partners, while ensuring we continue to strengthen our financial position through times of significant market uncertainty.

As we anticipated, our Profit before PB, tax and exceptional items was substantially lower than last year at £160.0m, down £132.8m or 45.4%. This was principally due to the significant operating profit decline in John Lewis & Partners, down £143.1m (55.5%) to £114.7m, which was driven by four major factors, each impacting profit by around a quarter of the year-on-year decline. These were:

• Weaker Home sales as subdued consumer confidence continued to depress demand for big ticket and bespoke items
• Lower gross margin. Our foreign currency hedging, from before the EU referendum, rolled off and in spite of the resulting cost price inflation, we decided not to increase prices. At the same time the market became significantly more promotional and we made sure our customers also benefited from those lower prices through our ongoing commitment to price competitiveness and Never Knowingly Undersold. We expect continued pressure on gross margins in 2019/20 before it rebuilds the following year.
• Increased IT costs. Over the last few years we have steadily increased IT investment to set ourselves up for the future. A number of those significant new systems are now operational resulting in incremental maintenance, support and depreciation costs.
• Property related. This was partly the opening and running costs of two new shops and partly a large property profit we made in 2017/18.

Waitrose & Partners grew operating profits by £31.2m (18.1%) to £203.2m. This was mainly due to improved gross margins, which benefited from the detailed work improving our ranges for customers. That work will continue throughout 2019.

After including exceptional income of £2.1m (2017/18: charge of £111.3m) and Partnership Bonus, our Profit before tax was £117.4m, up £9.9m or 9.2% on last year.

We have maintained total investment at around £400m, with capital investment forming the major part of that. Operating capital investment, which excludes the acquisition of freeholds of our trading branches, was £310.1m, a decrease of £54.3m or 14.9% on last year. However, in addition, we have invested significantly in products and services, in leadership training, in change costs associated with restructuring and transformation of the business, and a greater proportion of our IT investment is revenue investment.

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): Return on Invested Capital (ROIC), Debt Ratio and Profit per average FTE.

• One of our priorities remains to reduce our Debt Ratio to around three times cash flow within around five years. It has remained at 4.3 times this year, despite lower profits, as our total net debts have reduced by £401.3m to £2,682.2m, mainly due to the reduction in the accounting pension deficit of £218.4m (net of deferred tax) and strong cash generation. The reduction in the accounting pension deficit principally reflects an improvement in the real discount rate used to value the liabilities and an increase in pension fund assets. Our pension review is still progressing with any changes to our future pension benefit expected to be agreed in the first half of 2019.
• Our ROIC, 7.3% (2017/18: 9.1%) and Profit per average FTE, £5,000 (2017/18: £6,900) measures are significantly lower than 2017/18, reflecting the substantially lower profits. 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.

We have been preparing for the operational implications of Brexit for well over a year, and are in a good position for a managed transition. This covers currency, tariffs, customs and labour. The main risk in an unmanaged transition is a strong fall in consumer confidence and the impact that has on trade. Given the current level of uncertainty, we expect 2019 trading conditions to remain challenging. We have built up a strong liquidity position at nearly £1.5bn so that we have the financial headroom to mitigate the risks and make sure we can continue investing for the future.

The Partnership will adopt IFRS 16 ‘Leases’ for the financial year beginning 27 January 2019, which specifies how to recognise, measure, present and disclose leases. The Partnership has adopted the modified retrospective approach on transition. While there is no change in the underlying economics of our business, the adoption of IFRS 16 will significantly reduce our Partnership profit before tax and exceptional items and significantly increase our reported assets and liabilities. It is, however, expected to have no impact on our Debt Ratio as that already reflects an adjustment to include the present value of future rentals payable under operating leases. It will also have no impact on our cash flow.

On 30 January 2019, Waitrose & Partners announced changes to the Commercial operating model in head offices. No accounting for potential redundancies was recorded for the year ended 26 January 2019 in respect of these changes.

On 27 February 2019, Waitrose & Partners confirmed that following careful review of the relationship the commercial arrangement with Ocado will come to an end in September 2020, in line with contractual terms. We have strengthened our own online business significantly in recent years, and said last summer that we will double waitrose.com within five years. This change will be a major part of achieving this, and in future, waitrose.com and our shops will be the exclusive places in the UK to buy Waitrose & Partners products. We plan to open a second fulfilment centre to support growing volumes in the London area.

On 6 March 2019, Waitrose & Partners informed Partners that five shops will be sold to other retailers. No accounting for potential redundancies was recorded for the year ended 26 January 2019 in respect of these shop disposals.

 

Notes

1. These results are subject to audit. The Annual Report & Accounts 2019 will be published in April 2019.

2. Like-for-like sales up 1.3% in Waitrose & Partners and down 1.4% in John Lewis & Partners.

3. n/m - not meaningful

 

Exceptional items

Exceptional income totalled £2.1m (2017/18: charge of £111.3m) with £4.0m charge in Waitrose & Partners (2017/18: £52.2m), £22.1m charge in John Lewis & Partners (2017/18: £21.3m) and £28.2m income in Group (2017/18: charge of £37.8m). Further detail is included in the following table:

a) Net charge of £19.3m (2017/18: £40.5m) for redundancy costs, project costs and onerous contracts in relation to restructuring of pan-Partnership functions and other head office operations.

b) Net charge of £5.1m (2017/18: £5.5m) for asset impairments, accelerated depreciation, closure and redundancy costs for our existing physical estate.

c) Net charge of £6.7m (2017/18: £29.2m) for redundancy costs and project costs in relation to restructuring of our shop operations.

d) Following the signing of a lease contract, a charge of £12.6m has been recorded in relation to branch impairment in John Lewis & Partners. In 2017/18 there was a charge of £35.7m for branch impairments in Waitrose & Partners.

e) In 2016/17, a review of the John Lewis & Partners supply chain led to significant redundancy and restructuring costs which were recognised as exceptional. During the year to January 2019, a small credit of £0.5m (2018: £3.1m charge) has been recognised as actual costs incurred have been smaller than anticipated.

f) 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. During the year, the methodology for calculating the liability has been clarified and discussions with HMRC have completed resulting in a £30.3m (2018: £nil) release of the provision. Rectification payments have been made.

g) In September 2018, the Partnership reached a settlement in relation to an ongoing legal dispute, receiving income of £15.0m.

h) In 2017/18, income of £2.7m was recognised on finalisation of a property disposal which was previously recognised as exceptional.

Further disclosure on the strategic restructuring and redundancy programmes will be included in the Annual Report & Accounts 2019 which will be published in April 2019.

Net finance costs

Net finance costs decreased by £4.6m reflecting (i) 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 contributions, (ii) lower long leave finance costs arising from volatility in market driven assumptions, and (iii) higher interest receivable on cash deposits, partly offset by (i) fair value losses on foreign currency purchase commitments, (ii) incremental finance costs on the £125m new debt raised in the second half of the year, and (iii) a reduction in the level of borrowing costs capitalised for qualifying assets.