Just how much worse can things get at John Lewis?


Emma-Lou Montgomery - Fidelity Personal Investing

13 September 2018

The John Lewis Partnership has seen its profits fall to virtually zero in the first half of the year. It saw profits slide 99% to just £1.2 million in the six months to 28 July.

Even this time last year it would have been unthinkable that the retail giant that has long been seen as the bellwether of middle class consumer sentiment, could suffer such a catastrophic slide. For much of the past decade John Lewis has managed to remain a paragon of the retail sector, adapting sufficiently enough to withstand the shift to online shopping yet still managing to get shoppers through its doors.  

Yet it’s the John Lewis department store business that has been hardest hit. Waitrose, John Lewis’ supermarket chain, managed a 2.6% rise in sales for the six months to 28 July, although it too saw profits slide 12.2% to £96.4 million. But that, of course, has been completely overshadowed by the 99% slump in profits that the John Lewis Partnership experienced in the first half of the year. I suspect even the warning that full-year profits will also be “substantially lower” will have failed to register with any people yet as their ears are still ringing on news of the 99% slide in first-half profits.

The chasm between the retail winners and losers is widening by the day as today’s announcements from John Lewis and Wm Morrison Supermarkets demonstrate painfully clearly. Especially painfully if you’re an investor in one of the beleaguered retailers bearing the brunt of the cost conscious consumer crunch.

While John Lewis has all but failed to achieve any profit at all in the first half of the year, Morrisons has seen its sales soar. The Morrisons revival is being spurred on by its cost-conscious pricing and its solid positioning as a value retailer means that sales have now risen for the past 11 consecutive quarters. Like-for-like sales rose 4.9% in the six months to 4 August, beating the 3% rise achieved in the same period last year.

Profits, which came in almost a third lower, at £142 million, were hampered by £51 million of financial costs, including a £33 million bond tender offer, but investors are being rewarded with a special interim dividend of 2 pence a share, bringing the total interim dividend to 3.85 pence per share.

The fact is that it is all about price for today’s consumers and John Lewis which has steadfastly stuck to its pledge to remain “never knowingly undersold” has paid the price for doing just that. Cutting prices to match competitors is proving to be a dangerous game of retail cat and mouse that needs to be reviewed. John Lewis sold £5.5 billion worth of goods, yet made close to nothing.

Of course, this department store chains woes are not completely unique, as House of Fraser and Debenhams have shown. What is unique about John Lewis is the emotional effect it’s likely to have on not just consumers and the retail sector, but also the wider economy. John Lewis is not a publicly-quoted company but it doesn’t need to see its share price slump to see the profoundly unnerving effect this latest announcement will have on many. For it to founder completely, while once unthinkable is now a dangerous possibility. Sir Charlie Mayfield, chairman of the John Lewis Partnership, will need his board to pull out all the stops in these “challenging times” and do something radical in order to prevent its full-year profits, which are already expected to be “substantially lower” from falling through the (shop) floor in a similar fashion.

If history has taught us anything, it is that the once mighty can, and do, fall. If Sir Charlie wants to save John Lewis from being consigned to the retail history books he’s going to have to do something drastic. He has already eschewed all the usual turnaround measures such as closing stores and reining in investment. But buried in this latest financial statement is a clue as to what might save John Lewis during this retail rout - clearing the company’s debts as quickly as possible. It’s suitably understated and very ‘John Lewis’ and just might give the business the lifeline it needs.

Important information

The value of investments can go down as well as up so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.