The old adage is that “sales are vanity, profits are sanity”, so has the mighty JLP managed to translate its impressive top-line growth to the bottom-line?

The old adage is that “sales are vanity, profits are sanity”, so has the mighty JLP managed to translate its impressive top-line growth to the bottom-line?

Well, not particularly, is probably the best answer to that question, after seeing today’s final results from JLP for the year to end January. Sales were up by just over 9% to nearly £8.5bn (ex-VAT), but underlying profit before tax was only up by 16% to £410m, somewhat limited progress after the 4% dip in PBT to £354m in the year before.

Some people would say that the very mention of “profit” is rather grubby for such a venerable institution as the John Lewis Partnership, with its famously long-term attitude to retailing and its admirable devotion to customer service. But profits do matter to JLP, as it generates the cash to pay for the necessary capital investment in the business and return an acceptable bonus every year to the employees of both Waitrose and the Department Store Divisions.

The John Lewis Partnership is not quoted on the stockmarket, although it has Bondholders to keep happy, and it takes its PR very seriously. It presents its results to the City twice a year and is keen to be benchmarked against its peers.

So, how does JLP compare with Marks & Spencer in terms of performance? Both are, of course, major players in Food and Non-Food retailing in the UK. At M&S, Food is getting on for 55% of total sales, although at JLP the ratio is, interestingly, more like 65% (in terms of Waitrose’s contribution to total sales).

In stark contrast to JLP, M&S is struggling to grow its LFL sales, but it is just about managing to hold its UK operating profits, thanks to some tight cost control. And, just by way of illustration, if JLP had limited the growth in its stated operating costs to the c2% at M&S, then its operating profits would have been nearly £150m higher in 2012/13, given the powerful leverage of the strong top-line sales growth (notwithstanding the pressure on gross margins).

The M&S comparison on costs is not completely fair, as JLP strike their operating costs after distribution costs (which are charged against gross margin), but it makes the point that “normal” operating cost growth at JLP would have enabled it to make much more profit and pay an even higher bonus in 2012/13 (although the 17% payout was pleasing).

One frustration is that in the first half of last year, there were promising signs of positive operating leverage in the business, with lower operating cost growth combining with strong sales growth to drive a strong 60% recovery in interim profits. But operating cost growth clearly ramped up again in the second half, as second half profits at JLP were disappointingly flat.

Now, JLP is keen to drive home its advantage by investing even more for the long-term and it is under no pressure to maximise short-term profits, when so many of its peers are in disarray (including M&S). But the overall JLP operating margin of 5.3% in 2012/13 is unsatisfactory for a business of this quality: even M&S will have achieved an operating margin of about 7.5% in the UK last year. Why the gap? After all, both businesses enjoy scale benefits and strong freehold property backing.

Well, in broad terms, Waitrose is doing its bit for the Partnership, as a 5.4% operating margin (pre Central Costs) is perfectly reasonable for a supermarket chain, although there are signs that it is keen to be not seen making too much money at present.

The “problem” for JLP is the Department Store business, as the 7.1% operating margin (pre Central Costs) ought to be better, notwithstanding the useful recovery in profitability last year. But the business does not enjoy the high gross margins of its Fashion-focused peers, whilst the high fixed cost base is not easy to manage at a time when sales are migrating so quickly Online. Selling household goods on the High Street is not exactly a licence to print money in this day and age and nearly 40% of the Department Store sales last year came in low margin Electricals and Technology.

The Department Stores grew market share impressively last year, thanks to its success in selling tablet PC’s and Online multi-channel retailing, and the new-year is off to a strong start. But the LFL sales comps get much tougher later this year and improving profitability further will be a challenge for its energetic management team.

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.