John Lewis is down, but not (blown)

John Lewis is down, but not (blown)

The news of a 99 percent drop in John Lewis's earnings felt like a mess of society. Possibly because the partner-own group is the material supplier for the society. Julie Palmer of the bankruptcy trustee Begbies Traynor called her "as significant as the fall of the Roman Empire". There were rumors that the company had spent £ 5 million on the employment of Elton John, who is known today for holding funerals. Had the retail rose in central England beaten a candle in the cold wind of the high street?

The pre-tax profit for the year was certainly reduced from £ 96.5 million to £ 1.4 million. The department stores of John Lewis fell into oblivion for the first time recently. Waitrose supermarkets achieved a 2.6 percent increase in sales, down 12 percent on operating profit.

But before anyone orders 3 yards of black silk crepe, lights a sandalwood candle by John Lewis & Partners, and at a time of national mourning, it is notable that it is not a death spiral. Unlike Debenhams, House of Fraser and other damaged store chains, John Lewis continues to expand both sales and customer numbers, and its record grows stronger. Total net debt has fallen by £ 700 million year-on-year. At the same time, the group's pension deficit has more than halved since January, accounting for £ 171 million, and its system is 98 percent funded.

And the factors wiping out the profit for the first half of the year were also forewarned in June: lower margins and investment in differentiation.

Margins have been hit by the stark contradiction in John Lewis's business model: a supposedly high-quality retail offering combined with a "never deliberately undercut" price guarantee. Try to keep this in "the most advertising market we've seen in a decade," and your margins are starting to look sickly. However, there is one obvious way to remedy this situation: turn half of your inventory into exclusive private label products for which price matching is not applicable. This restores the margins at Waitrose, where the middle-class gourmets switch to zhoug and kimchi paste with its own label and take the drink adornment of choice to a higher level: black limes. It should also help margins in John Lewis Womenswear, where private label widow weeds and lighter line sales are up 12 percent.

Investments have also been increased to £ 400m – £ 500m per annum to finance these areas, create differentiated products, enhance online experience and train staff. Even in the worst case of the economy, Chairman Charlie Mayfield predicts a return on this investment in two years.

However, John Lewis' other problems are far different from those of other retailers – and more difficult to deal with: weak sterling, ailing consumer confidence, a surplus of retail space. His earnings – if not his cash flow – will deteriorate in January when he starts to account for leases under IFRS 16.

But the fall of an empire? Or the end of an era? At least reports about John Lewis's death seem exaggerated now.

matthew.vincent@ft.com

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