Annual Report and Accounts 2016


John Lewis Partnership plc


31


Overview


In 2015/16 the Partnership delivered solid sales growth. Both Waitrose and John Lewis grew sales ahead of their respective markets, increasing their market shares. Partnership gross sales (including VAT) were £11.0bn, an increase of 2.5%, on last year (0.7% on a 53-week basis). Revenue, which is adjusted for sale or return sales and excludes VAT, was £9.7bn, up 2.2% (0.5% on a 53-week basis).


Profit before Partnership Bonus and tax was £434.8m, up 26.1% on last year (up 24.0% on a 53-week basis). This includes exceptional income of £129.3m following the sale of the Clearings building (2014/15: income of £7.9m from release of remaining liabilities following the 2013/14 review of holiday pay policy). Excluding exceptional items, it was £305.5m, down by 9.3% (10.9% on a 53-week basis).


Trading performance


Gross margin improved in both Divisions reflecting continued investment in our assortments and long-term relationships with our suppliers. Good cost control, particularly in the second half, helped counteract the deflationary pressures in the grocery market and the incremental costs of omnichannel trading in non-food. This resulted in operating profits before property profits increasing by £8.7m (3.9%) in Waitrose and £1.8m (0.7%) in John Lewis on a 52-week basis. Looking ahead we need to build profits further so that we can invest sufficiently to stay ahead in a fast-changing market.


Partners


Our Partners, as co-owners, each receive the same percentage of pay as Partnership Bonus, which flexes from year-to-year reflecting the performance of our business. Partners will share £145.0m in profit, which represents 10% of pay or the equivalent of more than 5 weeks’ pay.


Partners also continue to receive a number of other benefits. In total we have paid £452m in benefits to our Partners, including Partnership Bonus, pensions, Partner discount, catering subsidy, long service leave, leisure spending and the running of our five holiday centres.


Investment in the future


Capital investment in 2015/16 was £493.8m, a decrease of £177.1m (26.4%) on the previous year. However, we have continued to increase our investment in IT and distribution, which now represents 50% of our total capital investment.


Investment in Waitrose was £224.5m, down £164.0m (42.2%) on the previous year, and in John Lewis investment was £227.7m, down £4.2m (1.8%).


Pensions


The pension operating cost was £245.3m, an increase of £54.2m or 28.4% on the prior year costs, with £48.2m of the increase reflecting the substantial decline in the real discount rate used to determine the cost to 0.35% at the beginning of the year from 1.10% at the beginning of the previous year. Pension finance costs were £36.9m, a decrease of £0.7m or 1.9% on the prior year, reflecting a reduction due to the lower discount rate partly offset by a higher accounting pension deficit at the beginning of the year than at the beginning of the previous year. As a result, total pension costs were £282.2m, an increase of £53.5m or 23.4% on the prior year.


Total cash contributions to the pension scheme totalled £166.0m, a decrease of £326.8m or 66.3% on the prior year. The reduction reflects the additional contribution of £294m in December 2014 to prepay almost seven years of previously- agreed deficit reduction contributions to the pension scheme. Subsequent to our year-end, in February 2016, we made a contribution of £137.0m to the pension scheme to prepay approximately ten months of contributions. Our next triennial actuarial valuation will take place as at 31 March 2016.


The total accounting pension deficit at 30 January 2016 was £941.6m, a decrease of £307.7m (24.6%) since 31 January 2015. Net of deferred tax, the deficit was £789.2m. The accounting valuation of pension fund liabilities decreased by £161.0m (3.0%) to £5,140.0m, mainly reflecting an increase in the real discount rate used to value the liabilities. Pension fund assets increased by £146.7m (3.6%) to £4,198.4m.


The pension continues to be one of the most important benefits offered to Partners. We are moving to a hybrid pension scheme combining defined benefit and defined contribution pensions, where future pension risk is shared between Partners and the Partnership. Although our pension operating cost will start to be impacted by the changes that came into effect in April 2016, it will take a number of years for all the changes to take full effect.


Financing


At 30 January 2016, net debt was £372.5m, a decrease of £349.2m (48.4%) in the year. The reduction reflects our focus on cash generation driven by good cost control, the reduction in capital investment and the completion of the sale of our Clearings building.


Partners celebrate co-ownership at Partnership Day 2015


Partners were encouraged to try something new which saw them discovering new talents.


y 10%


Partnership Bonus for 91,500 Partners; equivalent to more than five weeks’ pay


Net finance costs on borrowings and investments increased by £8.5m (16.1%) to £61.3m, reflecting additional finance costs on the £300m bond issued in December 2014. After including the financing elements of pensions and long service leave and non-cash fair value adjustments, net finance costs decreased by £3.0m (3.0%) to £96.6m.


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It’s Your Performance


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