Electricals bright light for John Lewis as profits collapse

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 per cent to £1.2 million.

But demand for electricals at John Lewis and Partners – the new name of the department store chain following a rebrand this month – remained strong.

The firm said its electricals and home-technology (EHT) category outperformed the market, as a result of “particularly strong performance” in electricals, where sales were up almost eight per cent.

This was not sufficient to offset a decline in sales in other higher-margin categories and the Partnership reported an operating loss of £33.5m, down from an operating profit of £33m during the same period last year.

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 in what Sir Charlie 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 per cent. This category includes its fitted kitchens and bathrooms service.

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 “rather than scale”, with a focus on product innovation and differentiation.

It said its budget House brand had been performing well since relaunching in July.

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.”