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Home sales decline hits John Lewis profits

A decline in purchase of big-ticket home products cost John Lewis almost £65m of profits in the past year.

The chain saw operating profits fall 55% to £114.7m in the year to 26 January. It said it had been hit by four factors, each accounting for a quarter of the fall.

‘Weaker Home sales as subdued consumer confidence continued to depress demand for big ticket and bespoke items.

‘Lower gross margin. Our foreign currency hedging, from before the EU referendum, rolled off and in spite of the resulting cost price inflation, we decided not to increase prices. At the same time the market became significantly more promotional and we made sure our customers also benefited from those lower prices through our ongoing commitment to price competitiveness and Never Knowingly Undersold. We expect continued pressure on gross margins in 2019/20 before it rebuilds the following year.

‘Increased IT costs. Over the last few years we have steadily increased IT investment to set ourselves up for the future. A number of those significant new systems are now operational resulting in incremental maintenance, support and depreciation costs.

‘Property related. This was partly the opening and running costs of two new shops and partly a large property profit we made in 2017/18.’

‘The market context continues to be challenging. That’s evident in our results, especially in John Lewis, where we saw near constant discounting across many categories from October onwards in response to the combination of subdued demand, excess retail space and some other retailers’ distress,’ said Sir Charlie Mayfield, John Lewis Partnership chairman.

‘As a result, sales in John Lewis & Partners were up 0.7% (down 1.4% like-for-like). Weaker home sales combined with gross margin pressures drove around half of the reduction in profits, with the remainder largely due to additional IT costs and property related items.

‘In Waitrose we saw a 18% rebound in profits. This was driven by like-for-like sales growth of 1.3% and improved gross margin, which benefited from 24 range reviews, as well as stronger operational performance and well controlled costs, especially in the second half year.

‘Near-term uncertainty, politically and in the economy, is having a major impact on consumer confidence, but we do not believe the market conditions are cyclical. The disruption we have seen on the high street, including business failures and renewed interest in mergers and acquisitions, are instead signs of an inevitable market adjustment which will require greater clarity on whether brands are competing on scale or difference. The answer for the Partnership is clear and, despite tough conditions and lower profits, this has been a year when we have developed our brands and invested in Partners. Our difference comes from our people, and the energy, commitment and personality they bring to delivering excellent customer service and high quality products to our customers.’