John Lewis Partnership plc annual report and accounts 2012

Business review Risks and uncertainties

Our risk management strategy is consistent with our founder’s philosophy to run the Partnership on sound principles of good governance, to actively identify the risks being run in the business and mitigate them to the extent considered appropriate to safeguard the Partnership, both its business and its reputation. We therefore adopt a disciplined and proactive approach to balancing risk and reward. An overview of the principal risks and uncertainties facing the Partnership along with mitigating actions in place is set out below.

Economic

 As a retail business based and operating predominantly in the UK, the Partnership is particularly exposed to any economic downturn which could affect consumer confidence and therefore spending, most significantly in the Department Store and non food business.

The strength and diversity of the Waitrose and John Lewis businesses and brands, alongside our growing multi-channel and online strategy, and together with developing adjacent services businesses, forms an effective means of managing economic risk in the current retail environment. Our range and diversity of products and services bring us into competition with a wide range of UK and international retailers in largely mature market segments with low underlying growth. For this reason we continually focus on maintaining our pre-eminent product quality, customer service and supplier relationships, whilst retaining our competitive position, including in value and pricing, enabling us to maintain our appeal.

Financial risk

The principal financial risk which we face is the ability to generate and access sufficient funds to satisfy our business needs, to meet our Partners’ expectations for Partnership bonus and to mitigate against any adverse financial impact resulting from risks crystallising, including those identified in our business planning process. The other financial risks, together with mitigations, are covered in more detail below and in note 22 to the accounts:

• Funding and liquidity

Liquidity requirements are managed in line with short and long term cash flow forecasts linked to our trading patterns, business plans and budgets and reviewed against the Partnership’s debt portfolio and maturity profile. Details of the Partnership’s borrowings, together with their interest rates and maturity profiles, are provided in note 25 to the accounts.

• Interest rate risk

In order to manage the risk of interest rate fluctuations the Partnership targets a ratio of fixed and floating rate debt in line with its treasury policy. Exposures to interest rate fluctuations are managed using interest rate swaps. Details of the Partnership’s borrowings and interest rate exposures are provided in note 25 to the accounts.

• Foreign currency risk

 The Partnership uses derivatives to manage exposures to movements in exchange rates arising from transactions with foreign suppliers. Foreign currency exposures are hedged primarily using forward foreign exchange contracts. Details are provided in note 22 to the accounts.

• Credit risk

 The Partnership has no significant customer credit risk due to transactions being principally of a high volume, low value and short maturity. Cash deposits and other financial instruments give rise to credit risk on the amounts due from bank counterparties. These risks are managed by restricting such transactions to counterparties with a credit rating not less than a Standard & Poor’s equivalent ‘A’ rating and designating appropriate limits to each counterparty.

• Capital risk

 The Partnership maintains a capital structure which is consistent with an investment grade credit rating and maintains a prudent level of gearing.

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