Financial Analysis – John Lewis Partnership Plc.

Introduction

John Lewis Partnership Plc. (John Lewis) is one of the leading multichannel stores companies in the UK. The company has a long history of corporate success and development in the UK retail sector. It started in 1864, and presently the company owns 46 John Lewis stores and 346 Waitrose across the UK (John Lewis – About Us 2016). The company’s registered office is located in London, UK. The company also has e-commerce website and catalogue ordering system. Moreover, the company has its production unit and a farm.

The company prepares its financial statements on a consolidated basis and also provides segment reporting in the notes to financial statements. The company sells clothing, footwear, accessories, household items, grocery, etc. The company’s competitors include Tesco, Sainsbury’s, Aldi, Asda, Marks and Spencer, and online retailers. The company’s workforce consists of 91,500 employees. The company has an employee-owned structure in which employees are granted shares of the company and they play an important role in strategic choices made by the company (John Lewis – About Us 2016). The management report indicated that the company invested £45mn in 2015/16 to strengthen its relationship with partners (employees).

Moreover, the company has its constitution that sets out 4Ps for maximizing productivity and performance of employees (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016). The company recently disclosed its financials for the year ended January 30, 2016. The company achieved sales of £11.018bn in 2016 and its net profit for the year was £223.2mn (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016).

In the last two years, the company had faced several challenges regarding declining profit margin on its products and tough competition in the UK retail sector (Skapinker & Felsted 2015). The company revised its divisional strategies to address these challenges. The company implemented a monitoring system that provides regular feedback from its employees and customers (John Lewis – Our Responsibilities 2016).

The company has adopted an aggressive strategy to deal with the new challenges emerging by improving its partnership with employees to ensure that employees can understand management’s strategy and expectations and they perform in the best interest of their company (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016). The competition was led by Amazon, an online retailing company, which forced the company’s management to focus on improving the company’s e-commerce website and include perishable products that customers want to purchase on a regular basis (Ruddick 2015a). The strategy was important as Amazon has a tax advantage over other retail companies and it can easily compete with low prices (Ruddick 2015b).

In the current report, the financial performance of John Lewis is evaluated by using common size statements and financial ratio analysis. The financial ratio analysis includes key ratios to investigate the company’s performance concerning liquidity, solvency, asset management efficiency, working capital management, and profitability. The values obtained for these ratios are discussed with supporting information extracted from the company’s management report and other sources (non-financial information).

Moreover, the performance of John Lewis is compared with industry average figures. Based on the evaluation, the current report provides a balanced scorecard that identifies two areas that the company needs to focus on and develop strategies to meet its vision and objectives. The report also includes limitations of the tools used for analysing the company’s performance and strategy. The reason for carrying out this analysis is to present recommendations for the company to deal with the emerging challenges in the UK retail sector. The key findings of this report highlight that the company has realized the impact of tough competition and responded swiftly to maintain its strategic position in the market.

Common Size Statements

The common size statements including consolidated income statement and consolidated balance sheet are prepared. The limitation of this analysis is that it is based on historical financial information of the company and does not explain the reasons for changes in figures (Singh 2015).

Consolidated Income Statement
			Horizontal Analysis		Vertical Analysis
	2016	2015	Change £m	Change %	2016	2015
Gross Sales	11018.8	10,942.60	76.20	0.70%	100.0%	100.0%
Revenue	9748.8	9701	47.80	0.49%	88.5%	88.7%
Cost of Sales	-6442.1	-6426.9	-15.20	0.24%	-58.5%	-58.7%
Gross Profit	3306.7	3274.1	32.60	1.00%	30.0%	29.9%
Other Operating Income	85.2	86.1	-0.90	-1.05%	0.8%	0.8%
Operating Expenses before exceptional item	-2989.8	-2917.9	-71.90	2.46%	-27.1%	-26.7%
Operating profit before exceptional item	402.1	442.3	-40.20	-9.09%	3.6%	4.0%
Exceptional item	129.3	7.9	121.40	1536.71%	1.2%	0.1%
Operating profit	531.4	450.2	81.20	18.04%	4.8%	4.1%
Finance costs	-100.8	-102.5	1.70	-1.66%	-0.9%	-0.9%
Finance income	4.2	2.9	1.30	44.83%	0.0%	0.0%
Profit before Partnership bonus and tax	434.8	350.6	84.20	24.02%	3.9%	3.2%
Partnership bonus	-145	-156.2	11.20	-7.17%	-1.3%	-1.4%
Profit before tax	289.8	194.4	95.40	49.07%	2.6%	1.8%
Taxation	-66.6	-50.9	-15.70	30.84%	-0.6%	-0.5%
Profit for the year	223.2	143.5	79.70	55.54%	2.0%	1.3%
Profit before Partnership bonus, tax, and exceptional item	305.5	342.7	-37.20	-10.85%	2.8%	3.1%

Table 1: Common Size Consolidated Income Statement.

Consolidated Balance Sheet
			Horizontal Analysis		Vertical Analysis
	2016	2015	Change £m	Change %	2016	2015
Non-Current Assets
Intangible assets	388.4	335.5	52.9	15.8%	6.25%	5.73%
Property, plant and equipment	4189.3	4160.1	29.2	0.7%	67.44%	71.08%
Trade and other receivables	65.7	62.7	3	4.8%	1.06%	1.07%
Deferred tax asset	33.6	123.8	-90.2	-72.9%	0.54%	2.12%
	4677	4682.1	-5.1	-0.1%	75.29%	80.00%
Current assets					0.00%	0.00%
Inventories	621.9	580.7	41.2	7.1%	10.01%	9.92%
Trade and other receivables	223.9	208.6	15.3	7.3%	3.60%	3.56%
Current tax receivable	0	18.9	-18.9	-100.0%	0.00%	0.32%
Derivative financial instruments	11.5	9.6	1.9	19.8%	0.19%	0.16%
Assets held for sale	0	15.7	-15.7	-100.0%	0.00%	0.27%
Short-term investments	10	0	10	#DIV/0!	0.16%	0.00%
Cash and cash equivalent	667.4	336.9	330.5	98.1%	10.74%	5.76%
	1534.7	1170.4	364.3	31.1%	24.71%	20.00%
Total assets	6211.7	5852.5	359.2	6.1%	100.00%	100.00%
Current liabilities
Borrowing and overdrafts	-57.7	0	-57.7	#DIV/0!	-0.93%	0.00%
Trade and other payables	-1617.4	-1572.2	-45.2	2.9%	-26.04%	-26.86%
Current tax payable	-27.1	0	-27.1	#DIV/0!	-0.44%	0.00%
Finance lease liabilities	-2.6	-3.1	0.5	-16.1%	-0.04%	-0.05%
Provisions	-141.6	-110.1	-31.5	28.6%	-2.28%	-1.88%
Derivative financial instruments	-2.3	-6.6	4.3	-65.2%	-0.04%	-0.11%
	-1848.7	-1692	-156.7	9.3%	-29.76%	-28.91%
Non-current liabilities					0.00%	0.00%
Borrowings	-974.1	-1030.2	56.1	-5.4%	-15.68%	-17.60%
Trade and other payables	-209.3	-175.9	-33.4	19.0%	-3.37%	-3.01%
Finance lease liabilities	-24.7	-28.3	3.6	-12.7%	-0.40%	-0.48%
Provisions	-148.2	-158	9.8	-6.2%	-2.39%	-2.70%
Retirement benefit obligations	-941.6	-1249.3	307.7	-24.6%	-15.16%	-21.35%
	-2297.9	-2641.7	343.8	-13.0%	-36.99%	-45.14%
Total Liabilities	-4146.6	-4333.7	187.1	-4.3%	-66.75%	-74.05%
Equity
Share capital	0.6	0.6	0	0.0%	0.01%	0.01%
Other reserves	15.4	8.8	6.6	75.0%	0.25%	0.15%
Retained earnings	2049.1	1509.4	539.7	35.8%	32.99%	25.79%
Total equity	2065.1	1518.8	546.3	36.0%	33.25%	25.95%

Table 2: Common Size Consolidated Balance Sheet. Source: (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016).

It could be indicated that the company’s sales and profit for the year increased in 2016. The company focused on controlling costs and improving efficiency to achieve higher profit than the previous year despite a decline in consumer by consumers and increase in food inflation (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016). Moreover, the company’s consolidated balance sheet indicated that the company’s total assets increased by £359.1mn in 2016 that resulted in higher net book value of the company. The most significant change was noticed in the company’s cash and cash equivalent that increased by 98.1%. The company restructured its investments and sold least effective assets (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016).

Financial Ratio Analysis

The reason for using financial ratio analysis is that it allows the comparison of financial performance of a company over a period and with other companies. However, there are two limitations that must be highlighted here include the historical nature of financial data and lack of availability of industry averages. For industry comparison, the values of ratios of the company’s competitors are used. The results of the financial ratio analysis are provided in the following table.

John Lewis Partnership LLC, Financial Ratios
		2016	2015
Liquidity
Current Ratio =	Current Assets	0.83	0.69
	Current Liabilities	1534.7/1848.7	1170.4/1,692
Quick Ratio =	Current Assets-Inventory	0.30	0.35
	Current Liabilities	(1139.5-621.9)/1,705.6	(1170.4-580.7)/1,694.9
Solvency
Debt to Equity =	Total Debt	2.01	2.85
	Total Equity	4,146.6/2,065.1	4333.7/1,518.8
Times Interest Earned =	Operating Profit	4.39	4.52
	Net Interest Expense	423.6/(100.8-4.2)	450.2/(102.5-2.9)
Asset Management
Return on Assets	Net Income	3.59%	2.45%
	Total Assets	223.2/6211.7	143.5/5,852.5
Asset Turnover =	Total Revenues	1.57	1.66
	Total Assets	9748.8/6211.7	9701/5,852.5
Profitability
Net Profit Margin	Net Income	2.29%	1.48%
	Revenues	223.2/9748.8	143.5/9701
Return on Equity	Net Income	10.81%	9.45%
	Total Equity	223.2/2,065.1	143.5/1,518.8
Working Capital Management
Receivable Turnover	Sales	43.54	46.51
	Receivables	9748.8/223.9	9701/208.6
Receivable Days	365	8.38	7.85
	Receivable Turnover
Payable Turnover	COS	3.98	4.09
	Payables	6,442.1/1617.4	6426.9/1,572.2
Payables Days	365	91.64	89.29
	Payable Turnover
Inventory Turnover =	COS	11.63	11.07
	Inventory	6,442.1/554.0	6426.9/580.7
Inventory Days =	365	31.39	32.98
	Inventory Turnover

Table 3: Financial Ratio Analysis.

The liquidity position of the company remained weak in 2015 and 2016 as the values of current ratio were less than one. The company’s current assets were less than its current liabilities. The balance sheet indicated that the company’s payable were significantly high in both 2015 and 2016. The delay in payment to suppliers can affect the company’s relationships with them. Furthermore, values of quick ratio indicated that a significant proportion of the company’s cash was held in inventory (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016).

The holding of large inventory by the company was similar to other companies in the retail sector. However, the company could face major problems if it fails to generate higher sales and lower its cost of sales and expenses.

The solvency position of the company also suggested that the company relied heavily on external borrowing to meet its shortfalls. The value of debt to equity ratio improved from 2.85 in 2015 to 2.01 in 2016. However, its high value implies that the company needs to be careful about its leverage position. In comparison, Marks and Spencer had debt/equity ratio value of just 0.55 in the same period (Marks & Spencer Group PLC 2016).

The higher cost of borrowing can reduce the company’s profit for the year. On the other hand, the values of times interest earned indicated that the company generated sufficient operating profit to meet its interest payment obligations. The shareholders may demand higher return in the coming year, and if the company fails to reduce its debt burden, then the agent-shareholder relationship can be negatively affected (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016).

The company’s asset management was efficient as the company generated a reasonable return on assets in both years. However, it was not consistent with the industry trends as other companies such Marks and Spencer had a higher return on assets of 6.04% (Marks & Spencer Group PLC 2016). The company generated £1.57 per £1 of its assets in 2016. Also, there was a decline in this value mainly due to the tough economic conditions and competition in the market that affected consumer preferences and choices (John Lewis Partnership Plc. Annual Report and Accounts 2016 2016).

The company’s profitability remained low in both years. When compared with Marks and Spencer, it could be noted that its competitor had a higher net profit margin. Furthermore, the return on equity remained lower than that of Marks and Spencer. These low values could raise a serious concern for the company. The online companies including Amazon are challenging grocery retailers in the UK, and if these companies manage their supply chain more efficiently then companies like John Lewis could face major financial problems.

The analysis of working capital management indicated that the company remained efficient in managing its trade and other receivables and inventories. However, the company’s weakness could be highlighted regarding its huge payables that must be settled within a year. Any problem with the company’s sales and ability to generate cash from operating activities can delay payments to suppliers and affect the overall business.

Balanced Scorecard

A balanced scorecard is an important strategy tool that helps businesses plan for the coming period. It uses both financial and non-financial measures that assist in better planning and management of objectives. Often balanced scorecards are criticised for setting optimistic targets without a concrete plan to achieve them (Kaplan & Norton, 2013).

The following balanced scorecard is developed with two perspectives by considering non-financial information related to the company’s business and problems. It could help the company in better strategic planning and improvement of its current business position. The vision of John Lewis is “’the happiness of all our members, through their worthwhile, satisfying employment in a successful business” (John Lewis – FAQs about the Partnership 2016). The targets set out below can be related to the company’s objectives that are to improve its sales and achieve a better return on investment.

Perspective	Objectives	Measures	Targets	Initiatives
Customer	To improve customer satisfaction regarding product quality and value for money.	Increase in sales. Increase in repeated sales. High customer retention.	Achieve sales growth of 10%.	Better CRM mechanism. Better product profile. Improve store layout.
Learning and Growth	To improve e-commerce system and offers.	Enhance system, security, and availability of products.	Increase online sales by 20%.	System improvement through further development. Include perishable items. Improve delivery methods and time.

Recommendations

The analysis presented above indicates that the company had shown improvement in 2016 regarding its financial performance. However, the key performance ratios indicated that the company still performed poorly in 2016 and also in comparison to its competitor. Based on the analysis, the following recommendations are provided that could help John Lewis in improving its business position.

1. The company should acknowledge low consumer spending on clothing and food, and it should focus on cutting down its cost of sales and other expenses.
2. The company should pay off its debt to improve its financial leverage. The company can invest in business development and increase shareholders’ return rather than paying high-interest charges.
3. The company should lower payable turnover days as it could the availability of products in its stores.
4. The company should focus on its online business strategy and improve the customer buying experience.
5. The company should engage its customers through different marketing and promotional activities.

List of References

John Lewis – About Us. 2016. Web.

John Lewis – FAQs about the Partnership. 2016. Web.

John Lewis – Our Responsibilities. 2016. Web.

John Lewis Partnership plc. Annual Report and Accounts 2015. 2016. Web.

Kaplan, R & Norton, DP. 2013. Alignment: Using the Balanced Scorecard to Create Corporate Synergies, Harvard Business Press, Boston.

Marks & Spencer Group PLC. 2016. Web.

Singh, SK. 2015. Accountancy: Accountancy, SBPD Publications, New Delhi.

Skapinker, M & Felsted, A. 2015. John Lewis: trouble in store. Web.

Ruddick, G. 2015a. John Lewis bonus falls victim to supermarket price war. Web.

Ruddick, G. (2015b). John Lewis profits fall as costs and competition increase. Web.