John Lewis has said pre-tax profits before exceptional items for the half-year to the end of July have been practically wiped out in a “challenging market”, blaming heavy competitor discounting and Brexit uncertainty.
The firm, which owns the iconic chain of British department stores and the Waitrose supermarket, said profits before tax and exceptional items – on fairly static revenue of £5.5 billion– slumped by 99.8% to £1.2 million.
Sir Charlie Mayfield, chairman of the John Lewis Partnership, said: “These are challenging times in retail.
“Our profits before exceptionals are in line with what we said they would be at our strategy update in June.
“We’re continuing to improve our offer for customers, while ensuring we have the financial strength to continue developing our business going forward. This is reflected in both brands continuing to grow sales and customer numbers, and our total net debts reducing.”
The firm blamed the profit slump on heavy discounting by competitors of John Lewis and Partners – the new name of the department store chain following a rebrand this month – in what Sir Mayfield called “the most promotional market we’ve seen in almost a decade”.
He said: “The pressure on gross margin has predominantly been from our commitment to maintain price competitiveness. This reflects our decision not to pass on to our customers all cost price inflation from a weaker exchange rate and from our Never Knowingly Undersold promise, where we have seen an unprecedented level of price-matching as other retailers have discounted heavily.”
Sir Charlie said gross margin was also affected by a sales mix shift towards electronics rather than big-ticket items in the department’s store’s home category, where sales fell 4.2%. This category includes its fitted kitchens and bathrooms service.
The Partnership said it outperformed the market in electricals and home technology (EHT), driven by “particularly strong performance” in electricals where sales were up almost 8%.
New shops and investment in cyber-security and data protection also hurt overall profits, but the firm said that it had reduced net debts by £700m to ensure a strong financial position “in order to invest in our strategy of differentiation at a rate of £400m to £500m per year”.
The John Lewis Partnership set out its new strategy in June, announcing plans to grow through “differentiation rather than scale”, with a focus on product innovation and customer service.
It said its budget House brand had been performing well since relaunching in July.
But the firm said that full-year profits would most likely be “substantially lower” than last year because of the “uncertainty facing consumers and the economy, in part due to ongoing Brexit negotiations”.
Profit growth in Waitrose & Partners is expected to be offset by continuing margin pressure in John Lewis & Partners and by the cost of investment.
“We are continuing with our plans for the future in this half and have great confidence in the attractiveness and potential of our offer across Waitrose & Partners and John Lewis & Partners as we approach the final quarter,” the firm added.
Sofie Willmott, senior retail analyst at GlobalData, said: “The retailer is wise to evolve its strategy to focus on its unique business model and strong service credentials to protect its position in the market, while also increasing the proportion of exclusive products and admirably still honouring its customer price promise that it is so well known for.”