John Lewis profits dive due to market pressures

John Lewis Partnership, the employee-owned department store giant, reported almost a 60% drop in profits for the first half due to industry price and wage pressures that will result in staff cuts and fewer store openings.

The group recorded “solid” gross sales growth of 3.1% to £5.27bn for the six months ending 30 July, with Waitrose sales up 2.2% and John Lewis stores 4.5% higher as both increased market share and customer numbers despite the challenging markets.

However operating profit fell by 58.3% to £113.7m and profit before tax and exceptional items fell 14.7% to £81.9m.

John Lewis attributed this to its commitment to competitive pricing, excellent service, maintaining pay differentials and investing for the long term. Management expect these pressures to continue throughout the second half and into the next financial period.

The group increased pay for its lowest-paid partners, as John Lewis workers are called, by £33m as the group aims to keep average partner earnings well above the new minimum wage. However, it warned there would be a “steady reduction” in staff numbers from now on.

Chairman Charlie Mayfield said the lower profits reflected market conditions and, in particular, steps management was taking “to adapt the Partnership for the future".

“These are not as a consequence of the EU referendum result, which has had little quantifiable impact on sales so far. Instead there are far reaching changes taking place in society, in retail and in the workplace that have much greater implications.”

One impact of the Brexit vote however was that the pension deficit soared 54.4% to £1,45bn compared to January because of the historically low bond yields in recent months, though the lowered net debt to £549.3m from £664.6m a year ago.

The firm has prioritised a number of key areas of investment to get ahead of the significant changes that are affecting the retail market such as IT, its distribution network and pay. Also shifting investment towards existing Waitrose stores in resulting has resulted in exceptional property asset write-downs, while it plans to open just five convenience stores and two full size supermarkets in the second half.