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Nish Kankiwala, the first ever chief executive of John Lewis in its 159-year history, took over last month at a turbulent time for the retailer.
On only his second day in the job, the former Hovis boss told the group’s 74,000 staff the business had to change “at pace” — and for good reason.
The mutual, which owns the eponymous department stores and supermarket Waitrose, is grappling with problems familiar to many of its rivals: surging inflation and poor consumer sentiment, which pushed it into an annual pre-tax loss of £234mn last year with overall sales down 2 per cent to £12bn.
Many retailers are under strain but the fate of John Lewis, as a chain beloved by Middle England, is particularly closely watched.
At the heart of the dilemma for John Lewis is its unusual partnership structure whereby it is also owned by those 74,000 employees — vaunted a decade ago by former deputy prime minister Nick Clegg as a model for the wider UK economy, but one which also limits its financial room for manoeuvre.
The partnership is unable to raise equity externally because of this structure, although it has said it was keeping “future funding needs under review” after it emerged that it has not ruled out selling a minority stake to an outside investor.
“They are in a more constrained position than most retailers, they can’t just go to the equity markets and ask for money, so it does leave them with fewer options,” said Neil Saunders, a former John Lewis employee and managing director of GlobalData Retail. “One of the problems is the interest rate environment — borrowing in the traditional way, even for a big company like John Lewis, is more expensive than it once was.”
Kankiwala will have to make some early calls, including how to further tackle its net debt pile, which is about four times its annual cash flow, up from more than twice the previous year.
He must do this while also continuing to invest in the business and returning it to profitability as part of chair Dame Sharon White’s wider turnround plan.
Debt deadlines
John Lewis must repay a £50mn bank loan in December, plus a £300mn bond in January 2025, with a further £300mn due in 2034.
The group’s net debt of £1.7bn, including leases and pension liabilities, is currently near its lowest point in the last decade, in comparison to a high of £3.5bn in 2015.
It also has £1bn of cash and an unused £420mn bank facility. As its debt is mostly fixed, there is limited impact from rising interest rates. It expects its debt ratio — its total net debts to adjusted cash flow, and an indication of its ability to repay its debts — to improve this year.
Its debt level also compares favourably to some of its competitors, including Marks and Spencer, its nearest rival. M&S had net debt of £2.7bn last year, although in contrast to John Lewis it posted a pre-tax profit of £391mn.
“Their next refinancing is now less than two years away. I would think they would probably look to do something about that maybe early next year,” said Amarveer Singh, a senior analyst at CreditSights.
“For that, they do need to show investors a turnround story in the department store business; progress in the ongoing cost savings programme; and that they have the ability to get back to stable profitability and for the leverage to be back to what it was before this year.”
The retailer has reached £308mn of cost savings in the past two years, slightly surpassing a target of £300mn, and it expects cumulative savings of £873mn by January 2026.
John Lewis executives are confident about their ability to pay what they owe in the next couple of years and there are no imminent plans to raise more debt, according to people close to the company.
If they do, lenders will look in detail at the mutual’s financial health. Although it does not have an external credit rating, it has historically paid close attention to what its implied rating would be.
“The reason that was important, if it fell below, in “junk” status, you end up in that vicious spiral where when it comes to raising more money, you end up paying more interest,” said a former John Lewis executive.
According to CreditSights’s Singh, JLP’s first tranche of bonds, due in 2025, would be “quasi-BB” when comparing it to an index — below investment grade.
Implied credit ratings, however, are subjective. Singh added that given the challenging environment for retailers right now, only Tesco’s debt is actually rated investment grade.
A John Lewis spokesperson said: “Our capital management strategy is to have a prudent capital structure that seeks to maintain a financial risk profile consistent with an investment grade credit rating, to ensure our long-term financial sustainability.”
Rentals and refurbishment
White has presided over 16 store closures at John Lewis and thousands of redundancies since she took over in 2020, with 35 department stores left open.
Although the cost savings have been successful to date, and the mutual injected £500mn in its revival plan last year, Kankiwala has catch-up investment to make.
The business expanded rapidly between 2000 and 2015, going from 151 to 379 stores, some of which “look very tired”, especially Waitrose, according to Saunders. “Waitrose does need to refurbish some stores, which does become more costly.”
Another way for the mutual to raise cash to reinvest would be through property deals — it owns valuable freehold and leasehold buildings and land worth £2.5bn across the country.
Nevertheless, “sale and leaseback [deals] doesn’t help them, it doesn’t improve their debt position,” said the former John Lewis executive, nodding to the fact that the group would be charged a lot in rent given their prime locations in shopping centres and on high streets. “They would have to sell the assets outright and not lease them back.”
John Lewis’s recent £500mn tie-up with asset manager Abrdn to build 1,000 homes to rent should help put the mutual on firmer financial footing.
Becoming a major landlord is, principally “a balance sheet play”, according to people familiar with the partnerships’ thinking, which will also bring in income.
Building flats above its shops should push up the value of its assets, which in turn would allow the company to raise money should it need to. It will also receive rental income, in addition to the concierge services it will provide for a fee.
The chief executive may also need to turn his attention to John Lewis’s pension fund, which has swung to a £69mn deficit from a £474mn surplus, partly related to the market turmoil triggered last year by the then government’s “mini” budget.
John Lewis nonetheless has said that the next triennial valuation, which will be concluded within the next few months, is expected to show a well-funded plan meaning deficit repair contributions may not be required.
A spokesperson said: “We’re two years into our transformation plan and the partnership is in robust financial health. We have a strong balance sheet with high liquidity and net debt at historic lows.
“As we accelerate our plan, we will continue to invest in the areas that give our customers the trusted service, quality and value for money they expect from us.”
Kankiwala has plenty to keep him busy.
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