Yahoo Finance John Lewis profits halve as chairman warns over Brexit uncertainty
John Lewis profits have more than halved amid rising prices and weaker consumer demand prompted by Brexit.
In an update for the first six months of its financial year, the group, which owns Waitrose supermarkets as well as the John Lewis department store chain, said it expected the tough retail climate to continue throughout this year as UK consumers were less willing to spend money against a backdrop of higher inflation and political uncertainty.
As the government prepares for a fourth round of Brexit negotiations with the EU, the John Lewis chairman, Sir Charlie Mayfield, said uncertainty was being throughout the economy and a “serious” parliamentary debate about Brexit was now essential.
“Brexit is having an impact on everybody. Sterling is weaker and there is evidence to show that confidence is being affected. The issues related to leaving the EU are extremely complicated and we do want to see justice being done to that complexity. There needs to be serious parliamentary debate.
“There is a very complex negotiation before us and the core principles of that need to be thrashed out in order to increase the chances of a successful conclusion to the negotiation. If not there is a greater risk of a disorderly outcome.”
Mayfield’s warning came as he unveiled pre-tax profit at the John Lewis group had slumped 53% in the six months to the end of July, to £26.6m.
Much of the damage to the bottom line was due to £56m of redundancy and restructuring costs designed to improve productivity and accommodate the increasing demand for online shopping. When these one-off costs were stripped out, pre-tax profit was down almost 5% at £83m as higher costs ate into margins. Group sales rose by 2.3% over the period, to £5.4bn.
The department stores performed better than the Waitrose supermarket side of the group. Underlying profits increased 9.7% at the John Lewis stores to nearly £40m, while Waitrose profits fell 17.4% to £101m as costs rose three times faster than a 1.5% rise in prices. Waitrose boss Rob Collins said inflation in meat, fish and dairy had been very strong.
Mayfield said the retailer had not passed on to shoppers the full extent of its own rising costs resulting from the fall in the value of sterling. “We are not expecting these headwinds to diminish.” he said.
Aside from the cost of restructuring at John Lewis, Mayfield said profits had predominantly been affected by a squeeze on margins as tough competition was forcing the company to keep prices down despite rising costs.
But it was a different story at Morrisons, where bosses said they had kept profit margins steady despite cost inflation by increasing sales and improving efficiency in its supply chain, much of which is managed in house.
Underlying pretax profits at the recovering retail group rose 12.7% to £177m as sales rose 4.8% to £8.4bn.
The chief executive, David Potts, said the retailer’s set-up, with two-thirds of its products sourced in the UK and much of its meat fish and vegetables processed in-house, meant the company “should be giving it your best shot to be holding inflation down for customers”.
He said it was not possible to “defy gravity” on some products, such as butter and cream, where inflation had been very heady. But new avenues of distribution for Morrisons products, including selling Safeway-branded goods to the McColl’s convenience store chain from next year, supplying Amazon with groceries and a tie-up with petrol forecourt operator Rontec would all help boost productivity and margins despite rising inflation.
Mayfield said sales were rising so far in the second half, but warned that a number of factors would weigh on profits.
“Sales growth has continued in the first few weeks of the second half. We are well set for our all-important seasonal peak, but we expect the headwinds that have dampened consumer demand and put pressure on margins to continue into next year,” he said.
In March, when John Lewis announced full-year results for 2016, the bonus for staff was cut to just 6% of salary, the lowest level since the 1950s and down from 10% the year before. Mayfield said the second half of the year would be crucial to determining the staff bonus for next year, because the business makes two-thirds of profits during the latter half.
