City Snapshot: John Lewis cuts losses but exceptional costs leave it in the red

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The John Lewis Partnership has bounced back from a £635m loss in its first half of 2020, but remains in the red despite continued “positive momentum” for Waitrose.

For the first six months of the year, the group’s profit before exceptional items bounced back to £69m, compared to a pre-exceptional loss of £55m in the first six months of 2020.

Profit was up £121m compared to the pre-pandemic first half of 2019/20 when the group made a loss of £52m.

Cost reduction is a “key priority” and it made savings of £66m in the first half, while it also received business rates relief of £58m.

However, the Partnership had exceptional costs of £98m in the half; property costs of £24m, principally to settle lease obligations arising from John Lewis shop closures, and redundancy costs of £54m from restructuring.

Including these exceptional items, the Partnership made a loss before tax of £29m, albeit a significant improvement on last year’s loss before tax of £635m, which was dominated by a write down in the value of John Lewis stores.

Overall trading sales were up 6% year-on-year to £5.9bn and up 7% against the 19/20 financial year, with total revenues up 5% year-on-year to £5.1m.

Waitrose continued its positive momentum with 2% sales growth to £3.8bn and like-for-like sales up 4% on last year and up 10% on 2019/20.

This was largely driven by online growth as it increased capacity in its shops and delivery fleet and through a new fulfilment centre in Greenford, West London, while its partnership with Deliveroo expanded from 40 to 150 shops and is already generating sales of almost £1m a week with a potential reach of up to 13m customers.

Online sales now stand at 17%, up from 11% a year ago but fell back from 20% in March this year.

However, a combination of pandemic-related costs and growth of online has diluted operating margins at the supermarket, with trading operating profit down 10% to £525m and margin down to 13.8% from 15.8%.

John Lewis saw strong sales growth in the first half: up 12% on last year (like-for-like up 13%).

This was also slightly up by 1% on 2019/20 (like-for-like up 11%).

Almost 75% of sales were online in the first half, broadly the same as last year, and significantly up on pre-pandemic levels (40%).

Margins also rebounded strongly against last year as the stores returned to a more balanced pattern of trade, with fewer laptops, more lamps and linen sales. Technology sales were flat year on year while growth was strong in Home (up 23%), Fashion (up 22%) and Nursery (up 18%).

Compared to 2019/20, margins remained subdued as sales in lower margin categories remained higher than before the pandemic and inflationary pressures in global freight pushed up costs.

The Partnership said it has begun the financial year with profits recovering, ahead of both last year and expectations set at its year end results.

It noted that traditionally, profits are skewed to the second half of the year because of the importance of Christmas, especially in John Lewis. However, there is significant uncertainty given global supply chain challenges, labour shortages and other inflationary pressures.

It said it is taking a raft of measures to mitigate these risks and “deliver Christmas for our customers”.

These include a campaign to recruit drivers, offering competitive salaries and benefits, recruiting 7,000 temporary seasonal roles and booking additional freight to make sure John Lewis Christmas products arrive on time.

Chairman Sharon White commented: “Throughout the course of the pandemic, Partners have stepped up - going above and beyond to deliver exceptional service to our customers and supporting one another.

“We are in year one of our five-year Partnership Plan to return the business to sustainable profit of £400m a year, the level of profit required to meet our ambitions for customers, Partners and communities. This half year, we have had to take difficult but necessary decisions to reduce costs and improve our competitiveness.

“Our financial performance in the first half year shows encouraging progress against the Partnership Plan.”

Morning update

The Co-op saw first half group revenues edge remain above pre-pandemic levels and cut its underlying loss driven by strong grocery performance.

Total group revenues in the 26 weeks to 3 July were up 4.2% or £0.2bn on pre-pandemic levels, but down 3.2% on a year-on-year basis to £5.6bn from £5.8bn in 2020.

This annual revenue fall was mostly driven by the impact of the pandemic on shopping habits during the first half of 2020, amid peak lockdown restrictions.

Co-op Food sales (exc fuel) saw a significant 6.5% increase on pre-pandemic levels to £3.6bn, but down 2.8% on the first half of 2020.

Online food sales in the first half were approximately times more than those in the first half of 2020, with online services were made available in 1,000 more Food stores across 350 locations, reaching 52% of population.

During the period33 more stores opened, 53 refitted and eight extended and 14 franchise stores were opened, while 316 new stores being serviced by Nisa.

Elsewhere in the group funeralcare sales were down 7% to £142m due to a 17% decrease in the number of funerals, as death rate drops below the five year average (excluding 2020) after March.

Insurance sales revenue for new business model was at £18m and total revenue for legal services was at £20m.

The group made an underlying loss before tax of £15m (which includes £16m of furlough repayments) and represents a decrease of £71m against last year, which was impacted by Covid-19.

However, profit before tax of £44m is down £27m from £71m in the previous half year, due to planned investment in its food business impacting underlying profitability.

Co-op warned that the current unplanned supply chain challenges and ongoing Covid costs will bring greater levels of uncertainty and will apply pressure on expected level of profitability for year end.

However it said it will continue to “progress and evolve our business strategy, driving innovation and further efficiencies across the group” the Co-op will “continue to play an important role in helping the nation build back better and different, especially within areas which tackle inequality and unfairness”.

Co-op CEO Steve Murrells commented: “Despite the challenges that the pandemic has presented to us, we have adapted to become more efficient and agile, which has allowed us to continue to feed and care for the nation throughout the crisis. Whilst our commercial performance has been impacted by Covid-19 and Brexit headwinds, we have responded magnificently to support our colleagues, members, customers and communities throughout.

“Covid has reinforced the fact that our vision, ‘Co-operating for a Fairer World,’ has never been more relevant, as well as showing us the areas in which we need to move quicker. As we look ahead, we will continue to advocate the power of co-operation so that as we emerge from this crisis, we are able to empower and lift people up with us.”

Allan Leighton, non-executive Chair of the Co-op, added: “Everyone at the Co-op has worked incredibly hard since the outset of the pandemic to overcome the significant challenges that we’ve faced - it has been no small feat to continue to keep our stores and funeral homes running during this period. On top of that, we have still made a difference, supporting our communities and our colleagues.

“This experience has strengthened the business in many ways and has driven home the power of co-operation. Whilst there are undoubtedly challenges ahead, the business is well positioned to continue to grow and play its part in helping the nation build back better.”

Phillip Morris appears to have won its battle to take control of inhaler company Vectura after receiving backing from 74.8% of shareholders.

The tobacco company announced today the acceptances from almost three quarters of shareholders means it offer of 165p per share is now unconditional.

Commenting on the Offer, Jacek Olczak, PMI’s Chief Executive Officer said: “We have reached an important milestone in our acquisition of Vectura and are pleased to have secured over 74% of the company’s shares, in excess of the 50% required to make our offer unconditional and PMI the majority shareholder.

“We are very excited about the critical role Vectura will play in our Beyond Nicotine strategy and look forward to working with Vectura’s scientists and providing them with the resources and expertise to grow their business to help us achieve our goal of generating at least $1 billion in net revenues from Beyond Nicotine products by 2025.”

PMI has extended the offer period, which will remain open for acceptance until 30 September 2021.

Hilton Food Group has grown revenues by 35.3% in the first half of the year, driven by volume growth of 10.5%.

This increase was primarily attributable to Australia following the JV transition which was completed in July 2020 and in Brisbane where it is operating at higher volume levels.

Hilton also said it saw good progress in Europe particularly in relation to plant-based and fresh food contributing to strong revenue and profit growth.

Europe revenue increased by 3.7% on a constant currency basis with increases in raw material prices; growth was lower in 2021 due to the impact of reduced retail volumes compared with 2020, partly offset by improved trading in food service.

Overall operating profit for the first 28 weeks of 2021 was £39.0m, 23.8% higher than in the previous year and 21.6% higher on a constant currency basis.

However, operating margin dipped to 2.3% from 2.5% reflecting the Australia post-JV transition arrangements and also higher raw material prices with the operating margin per kg increasing to 14.9p per kg from 13.3p per kg last year.

Hilton said the Group’s growth prospects “remain strong as we explore further opportunities arising across our markets by the development of cross-category business as well as through our supply chain expertise including Foods Connected technology”.

It said its financial position remains robust and it continues to explore opportunities in which to invest and to grow the business both domestically and in overseas markets.

CEO Philip Heffer commented: “This has been another strong performance, delivering both volume and profit growth in the face of ongoing disruption as a result of Covid-19. The results we have published today demonstrate the resilience of our business model and our ability to create sustainable value by working in dedicated partnerships with our customers and suppliers around the world.”

“Our supply chain expertise, our international scale, and our market leading technology services have helped to drive growth across our portfolio - in meat, seafood, plant-based and vegetarian foods.

“The acquisition of the remaining 50% shareholding in Dalco is the natural next step towards our goal of becoming the global protein partner of choice, as more consumers seek out affordable, high quality, and sustainable protein.”

On the markets this morning, the FTSE 100 has recovered 0.4% to 7,047.2pts.

Risers include C&C Group, up 5.1% to 237.6p, Hilton Food Group, up 3.1% to 1,128p and SSP Group, up 1.9% to 254.7p.

Fallers include THG, down 4.3% to 611p, McBride, down 3.8% to 78.9p and FeverTree, down 2.8% to 2,284p. 

Yesterday in the City

The FTSE 100 fell back 0.3% to 7,016.4pts yesterday

FeverTree bucked the overall gloom, jumping 9.9% to 2,350p after its first half sales saw strong growth on strong international performance and the reopening of the on-trade in the UK.

Other risers included Coca-Cola Europacific Partners, up 2.3% to €49.30, Science in Sport, up 1.9% to 79p, Hotel Chocolat, up 1.8% to 372.5p, Imperial Brands, up 1.8% to 1,522.5p, Parsley Box, up 1% to 101p and Compass Group, up 0.9% to 1,448.5p.

Elsewhere, fallers included Just Eat Takeaway.com, down 4.5% to 6,307p, C&C Group, down 4.2% to 226p, Kerry Group, down 4% to 121.2p, PZ Cussons, down 3.8% to 239p, Greencore, down 3.7% to 129.5p, THG, down 3.5% to 638.5p, SSP Group, down 3.4% to 250p, Associated British Foods, down 3.2% to 1,852.5p and Ocado, down 2.7% to 1,808p.