John Lewis profits tumble in first half

First-half profits at John Lewis tumbled nearly 99%, with gross margins squeezed by discounting to keep up with competitors as the retailer warned that it continues to expect profit for this year to be "substantially lower" than the last.

In the half year ended 28 July, profit before tax and exceptional items fell 98.8% to £1.2m. Meanwhile, reported pre-tax profit declined 80.5% to £6m as revenue edged up 1.5% to £4.9bn.

The company said that gross margin at John Lewis & Partners has been squeezed in what has been the most promotional market it has seen in almost a decade.

Chairman Charlie Mayfield 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.

"Gross margin was also affected by a sales mix shift towards electronics rather than big ticket items in Home. In addition, John Lewis & Partners profits were impacted by the costs of new shops and higher IT costs as we continued to invest for future growth, and from lower property profits compared to last year."

The John Lewis & Partners division saw a first-half loss of £19.3m compared to a profit of £54.4m the year before, while profits at Waitrose fell 12.2% to £96.4m. Sales at John Lewis rose 0.8% to £2bn and sales at Waitrose were up 2.1% to £3.4bn.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "John Lewis is the bellwether of the UK retail sector, so the fact it’s finding life so hard is an indication of just how dire things are on the high street right now.

"John Lewis is doing the right thing by investing in services which can differentiate its stores, though one thing it can’t control is footfall in the shopping centres it operates from. The department store’s strong digital proposition should go some way to mitigating that risk however, with 39% of sales coming from the online channel.

"By combining bricks with clicks, retailers like John Lewis can cut their cloth to the new retail environment, while also offering customers a convenient location to collect and return items. Longer term, a hybrid digital and physical business model looks like the place most traditional retailers are trying to get to."