John Lewis plans to keep on spending despite £20m hit to profits

John Lewis, the Middle Britain retailing icon, revealed yesterday that its margins have been hit badly by its “never knowingly undersold” promise, forcing it to match price‑cutting rivals.

As price wars among retailers have escalated in a depressed high street, group pre‑tax profits slumped £20 million, or 18 per cent, to £90.4 million in the six months to July.

John Lewis, whose 32 department stores include outlets in Aberdeen, Edinburgh and Glasgow, said that holding firm to its 85‑year‑old trading pledge cost it more than £9m – equivalent to about £50,000 a day. Operating profits at the stores and website tumbled 55 per cent to £15.8 million, despite same‑floorspace sales edging up 1 per cent.

Charlie Mayfield, John Lewis’s chairman, said it would probably be at least next spring before any trading upturn.

Despite the strong headwinds, he defended the partnership’s strategy of lifting capital spending nearly two‑thirds to £253.8m, mainly on new stores, refurbishments and online operations.

“It may ease a bit early next year,” he said. “But there’s no point waiting for a recovery to come. More of the same really won’t wash in this market.”

Several retailing surveys have shown shoppers reining in spending in the face of higher prices, subdued wages and the threat of unemployment from the government’s austerity programme. Official data out yesterday showed that the UK’s jobless total surged 80,000 to top 2.5 million in the three months to July.

Mayfield said: “We have seen all our major competitors reporting really big declines in sales and their price-cutting has hit our profit margins.”

However, he added that John Lewis had increased market share in areas such as electricals and fashion. “It is extremely important to us to gain our customers’ confidence and hold on to those market share gains. We are investing for the long term,” Mayfield said.

It was also a tougher six months for the group’s upmarket food retailing business, Waitrose, where profits fell nearly 14 per cent to £110.2m on overall sales up 8.7 per cent at £2.6bn. Overall gross sales at the group climbed 6.4 per cent to £4.05bn in the first half.

John Lewis said trading over the past six weeks had improved, with a near‑4 per cent rise in like‑for‑like sales at Waitrose and a 1.9 per cent increase at the department stores.

Analysts welcomed the mutually‑owned firm’s decision to ramp up capital spending in the teeth of tough trading. Broker Espirito Santo said in a note: “Management believe this is in the longer‑term interests of the business and it is difficult to argue with this stance despite the magnitude of the profit decline.”

Analysts also noted that between 60 and 80 per cent of annual earnings at the group are traditionally made in the second half of the year, mainly due to Christmas trading.