22nd Sep 2005 09:30
Lewis(John) PLC22 September 2005 John Lewis plc Results for the six months to 30 July 2005 "Robust trading in challenging markets" • Group sales ahead 10% to £2.7 billion• Operating profit up 2% at £132 million*• Profit before tax down 3% to £78m• Waitrose's excellent progress highlights the consumer appeal of itsdistinctive quality fresh food offering• Waitrose sales up 18% (+4.4% like for like) to £1.6 billion. Divisionaltrading profit up 17% to £107m• John Lewis produces resilient performance in difficult market fornon-food retailing• John Lewis sales down 1.3% (-1.5% like for like) to £1.1 billion.Divisional trading profit down 21% to £51m * Operating profit before exceptional items and pensions. John Lewis plc Interim Results for the Half Year to 30 July 2005 Statement by the Chairman, Sir Stuart Hampson There's been plenty of comment that High Street trading over the last six monthshas been the worst in 15 years. I'd certainly agree with that, though lookingfurther back the retail cycle was a regular switch-back. We've been here before,and the Partnership's trading through these difficult conditions shows thestrength in depth within our businesses and the advantages of keeping our focuson long-term success. The Partnership's trade over the last half-year gives a clear picture of wherethe downward pressure on retail sales is hurting. There's been some growth inthe grocery sector - and Waitrose has been one of the pacesetters in picking upshare in these conditions. It's non-food retailing which has borne the brunt ofthe downturn, and in this difficult market the John Lewis sales line has beenmore resilient than most competitors and gives us confidence to continue ourinvestment in future department stores. Partnership sales for the half-year increased by 10 per cent to £2.7 billion.We've managed to edge forward our operating profit before pensions andexceptional items - a fair measure of our commercial performance against ourcompetitors - to £132m, plus 2 per cent. After taking account of those excludeditems, Ocado and a rising interest charge our profit before tax declined to£78m, 3 per cent below last year. The retail economy There's no disguising the severity of the down-turn in non-food retail spending,though it's the last decade of sustained growth which has really been theexception. Two factors make current conditions different from past experience ofthe retail cycle. First, we continue to see significant price deflation on manyof the goods we and others sell, and, secondly, the downturn is only affectingconsumer expenditure, and the rest of the economy isn't in recession. Waitrose The modest volume growth in the grocery sector which we experienced throughoutlast year continued into the first half of 2005/06. Inflation returned to themarket as a whole, but pricing continued to be fiercely competitive within themultiples. As our major competitors continue to jostle for position thepolarisation of performance became more obvious, and we again demonstrated thepower behind our own differentiated offer in the market, both in existingtrading areas and in locations where we have introduced new choice through ourbranch openings. Waitrose sales reached £1.6 billion, an 18 per cent uplift underpinned bymarket-beating like-for-like growth of 4.4 per cent (excluding petrol). Wesaw excellent growth at the former Safeway branches purchased from Morrison's in2004, as well as from new and relocated branches at Droitwich, Hersham andWallingford. With over 50 per cent of our sales now coming from outside the HomeCounties, we have amply demonstrated the broad appeal of a quality fresh foodoperator. Our growing market share has been driven across all fresh food categories, butwas particularly strong in Fruit and Vegetables. We also gained share in readymeals, supported by the launch of the "As Good As Going Out" range and therelaunch of "Perfectly Balanced". As consumers show increasing concern abouthealthy eating, traceability and animal husbandry the Waitrose reputation forstrong links with farmers and food suppliers continues to win us new customers.Extra selling space in some of our newer branches is enabling us to extendnon-food ranges, including those sourced by our John Lewis buyers, but we remainfirmly focused on being food specialists. Gross margins improved year on year despite increased investment in pricecompetitiveness. Distribution costs showed a significant but planned increase,both as a result of the opening of our third distribution centre at Bardon anddue to significant increases in fuel costs. Divisional profit (excluding lastyear's exceptional property gain) increased by 17 per cent to £107m, a usefuladvance given that our new branches are some way from their profit-earningpotential and that we have carried start up costs from the new regionaldistribution centre. John Lewis Against a background of exceptionally harsh trading conditions we are pleasedthat our like-for-like sales proved to be more resilient than competitors. Atminus 1.5 per cent, they came close to matching last year's strong performancein the first half. Overall sales were £1.1bn, a decrease of 1 per cent on lastyear. The improvements to our fashion offer have continued to drive sales growth inMens and Womenswear. Sales in beauty and technology products were also buoyant.Parts of our business are heavily exposed to the housing market, and our saleswere more subdued in those areas. However, our strategy to increase theproportion of own brand boosted sales and margin. In Large Electricals, wherethe rest of the market remained depressed, we saw a return to sales growth,spearheaded by our new range of John Lewis appliances. John Lewis Direct, ouron-line business, grew strongly, and we are becoming increasingly confident thatour investment in catalogues and direct mail is boosting sales in our shops aswell. Terrorist attacks took a predictably heavy toll on Central London sales at theend of the half-year. More positively, our new John Lewis branch at Traffordopened successfully at the end of May. Manufacturing branches continued to experience difficult conditions and producedsales some 16 per cent lower than in 2004. We announced last month a majorreorganisation of Stead McAlpin and J H Birtwistle to improve returns. Selling branch costs were well controlled in response to these tradingconditions. Divisional central costs were up £7m as part of a planned increaseto prepare for the 50 per cent expansion in space over the next 10 years. Theinvestment we have been making in our central teams is already generatingsignificant benefits, especially in margin, which was up 1 percentage point, andin stock control, where we finished the half with an improved stock positiondespite the shortfall in sales. Sales lower than originally forecast indepartment stores, the planned increase in central costs and increased marketingresulted in Divisional profit coming in at £51m, 21 per cent down on last year. Ocado Ocado continued to grow sales at a rapid rate reaching 35,000 orders per weekbefore the Summer break, compared with a corresponding figure of 21,000 ordersin 2004. During the course of the half-year, Ocado repaid an £18m loan to thePartnership, together with interest, having raised additional equity investmentsfrom others of their existing shareholders. Following this, the value of ourresidual holding has increased, which we are required to show as an exceptionalgain of £11m. Under new IFRS accounting rules we shall no longer need to accountfor our share of Ocado's future losses. Costs In 2004 we were depositing cash throughout the first half year, following thetransfer of customer accounts to HFC bank. That cash injection has now beenfully utilised and our net interest bill for the last half year was, inconsequence, 25 per cent higher at £17m. Pensions costs were up 2 per cent at£43m. Corporate costs were impacted by the office moves as we begin to vacateClipstone Street following the opening of the new Corporate offices atPartnership House. The outlook for the second half At the end of week 7 Partnership sales were 6 per cent ahead of last year.The first half-year outturn for John Lewis has always been of less significancefor the Partnership's full-year result than the second half, but we do notexpect any improvement in the market in this period. At the end of week 7 oursales are broadly level with last year. In the run up to Christmas we shallcontinue to maximise the benefits of being a multi-channel retailer, with ourincreasingly authoritative internet and catalogue businesses complementing theoffering in our department stores. Waitrose sales for the second half-year to date continue to be strong, withlike-for-like growth of 3 per cent in a slower market and with total growthslowing to 11 per cent as we pass the anniversaries of opening of the majorityof the branches acquired last year - but with plenty of immature space stillfuelling our forward run. We look forward to the opening of a new branch atLichfield next month plus five former Safeway branches at East Grinstead, Lewes,St Katherine Docks, Durham and Wilmslow. Major extensions will also be opened atCambridge, Cobham, Beaconsfield and St Albans. These are difficult times for all retailers, but not without precedent. It's inthese conditions that the Partnership's structure really counts, enabling us topursue resolutely our long-term preparations for growing the business whilemobilising the full commitment of our Partners to win a fuller share of themarket. Analysis of Divisional Half year Half year Change results to to 30 July 31 July % 2005 2004 £m £m Gross sales John Lewis division 1,062.9 1,076.8 (1.3) Waitrose division 1,623.1 1,374.2 18.1 ------------------- ---------- ---------- ------- Total gross sales 2,686.0 2,451.0 9.6 =================== ========== ========== ======= Divisional profits John Lewis division 51.0 64.5 (20.9) Waitrose division 107.3 92.0 16.6 ------------------- ---------- ---------- ------- Total divisional profit 158.3 156.5 1.2 Corporate and shared (26.5) (27.3) (2.9) services costs ---------- ---------- ------- ------------------- Operating profit before pensions and 131.8 129.2 2.0 exceptional items Exceptional operating items - 12.7 Pensions (42.6) (41.7) 2.2 ------------------- ---------- ---------- ------- Operating profit 89.2 100.2 (11.0) =================== ========== ========== ======= Consolidated income statement for the half year ended 30 July 2005 -------------------- --------- --------- ---------- Half year Half year Year to to to 30 July 31 July 29 January 2005 2004 2005 £m £m £m -------------------- --------- --------- ----------Gross sales 2,686.0 2,451.0 5,333.6Adjustment for sale or returnsales (42.2) (40.3) (89.2)Value added tax (232.5) (221.3) (486.9)-------------------- --------- --------- ----------Revenue 2,411.3 2,189.4 4,757.5Cost of sales (1,635.0) (1,473.6) (3,168.0)-------------------- --------- --------- ----------Gross profit 776.3 715.8 1,589.5Other operating income 18.4 14.0 31.5-------------------- --------- --------- ----------Operating expenses beforeexceptional items (662.9) (600.6) (1,279.8)Exceptional items - 12.7 16.5-------------------- --------- --------- ----------Total operating expenses (662.9) (587.9) (1,263.3)Pension costs (42.6) (41.7) (83.4)-------------------- --------- --------- ----------Operating profit 89.2 100.2 274.3Finance costs (21.4) (18.7) (38.4)Finance income 4.8 5.4 7.8-------------------- --------- --------- ----------Share of operating loss ofassociate (5.5) (6.6) (14.1)-------------------- --------- --------- ----------Exceptional gain 10.8 - -on dilution of interest inassociate --------- --------- ------------------------------Profit before Partnershipbonus and tax 77.9 80.3 229.6Partnership bonus - - (105.8)-------------------- --------- --------- ----------Profit before tax 77.9 80.3 123.8Taxation (19.9) (22.5) (36.6)-------------------- --------- --------- ----------Profit for the period 58.0 57.8 87.2-------------------- --------- --------- ---------- Consolidated statement of changes in equity for the half year ended 30 July 2005 -------------------- --------- --------- ---------- Half year Half year Year to to to 30 July 31 July 29 January 2005 2004 2005 £m £m £m -------------------- --------- --------- ----------Actuarial gains / (losses) ondefined benefit pensionschemes 33.9 (54.4) (60.7)Tax on items recogniseddirectly in equity (9.5) 16.3 18.2-------------------- --------- --------- ----------Net expense recogniseddirectly in equity 24.4 (38.1) (42.5)Profit for the period 58.0 57.8 87.2-------------------- --------- --------- ----------Total recognised income andexpense for the period 82.4 19.7 44.7Equity at start of period 1,308.5 1,264.0 1,264.0Dividends - including nonequity interests - (0.1) (0.2)Adoption of IAS 32 and IAS 39 (5.5) - --------------------- --------- --------- ----------Equity at end of period 1,385.4 1,283.6 1,308.5-------------------- --------- --------- ---------- Consolidated balance sheet as at 30 July 2005 -------------------- --------- --------- ---------- 30 July 31 July 29 January 2005 2004 2005 £m £m £m -------------------- --------- --------- ----------Non-current assetsIntangible assets 50.5 32.8 41.0Property, plant and equipment 2,601.6 2,420.6 2,573.4Prepayments 19.2 - 11.5Investment in associate - 20.6 13.1-------------------- --------- --------- ---------- 2,671.3 2,474.0 2639.0 -------------------- --------- --------- ----------Current assetsInventories 326.1 315.3 340.0Trade and other receivables 123.0 111.7 111.6Derivative financialinstruments 4.2 - -Cash and cash equivalents 130.2 164.6 194.4-------------------- --------- --------- ---------- 583.5 591.6 646.0 -------------------- --------- --------- ---------- Total assets 3,254.8 3,065.6 3,285.0-------------------- --------- --------- ---------- Current liabilitiesBorrowings and overdrafts (145.0) (125.5) (39.9)Trade and other payables (450.4) (452.2) (624.6)Current tax payable (6.3) (15.3) (5.7)Finance lease liabilities (0.6) (0.6) (0.6)Provisions (18.0) (10.7) (18.3)-------------------- --------- --------- ---------- (620.3) (604.3) (689.1) -------------------- --------- --------- ---------- Non-current liabilitiesBorrowings (505.7) (450.0) (530.0)Trade and other payables (23.8) (20.8) (22.2)Finance lease liabilities (30.7) (31.3) (31.0)Provisions (84.4) (65.7) (78.3)Deferred tax liabilities (151.2) (135.5) (139.9)Retirement benefit (453.3) (474.4) (486.0)obligations --------- --------- ------------------------------ (1,249.1) (1,177.7) (1,287.4) -------------------- --------- --------- ---------- Total liabilities (1,869.4) (1,782.0) (1,976.5)-------------------- --------- --------- ----------Net assets 1,385.4 1,283.6 1,308.5-------------------- --------- --------- ---------- EquityShare capital 6.8 9.0 9.0Share premium 1.1 1.4 1.1Other reserves 1.4 1.4 1.4Retained earnings 1,376.1 1,271.8 1,297.0-------------------- --------- --------- ----------Total equity 1,385.4 1,283.6 1,308.5-------------------- --------- --------- ---------- Consolidated cash flow statement for the half year ended 30 July 2005 Half year Half year Year to to to 30 July 31 July 29 January 2005 2004 2005 £m £m £m -------------------- --------- --------- ----------Cash flows from operatingactivitiesProfit before tax 77.9 80.3 123.8Amortisation of intangibleassets 4.0 4.2 8.2Depreciation 68.9 58.7 132.8 Net finance costs 16.6 13.3 30.6 Share of (profit) / loss ofassociate (5.3) 6.6 14.1Partnership bonus provision - - 105.8(Profit) / loss on disposalof - (12.6) (21.2)property, plant and equipment(Profit) / loss on disposalof - (2.6) (5.4)other assets(Increase) / decrease inworking capital (59.9) 17.3 65.7-------------------- --------- --------- ----------Cash generated from 102.2 165.2 454.4operationsTaxation paid (17.5) (11.5) (29.3)Partnership bonus paid (105.8) (87.3) (87.3)Finance costs paid (6.5) (3.1) (5.2)-------------------- --------- --------- ----------Net cash generated fromoperating activities (27.6) 63.3 332.6-------------------- --------- --------- ---------- Cash flows from investingactivitiesPurchase of property, plantand equipment (110.6) (293.0) (535.5)Purchase of intangible assets (5.3) (10.6) (12.0)Proceeds from sale ofproperty, plant and equipment 2.7 34.6 50.8Proceeds from sale of otherassets - - 3.3Loans (advanced to) / repaidby associate 16.3 (8.6) (8.6)Finance income received 10.7 6.4 8.5-------------------- --------- --------- ----------Net cash used in investingactivities (86.2) (271.2) (493.5)-------------------- --------- --------- ---------- Cash flows from financingactivitiesInterest paid on bonds (24.2) (5.1) (15.6)Payment of capital element offinance leases (1.1) (1.1) (2.1)Payments to shareholders(preference and equity) (0.2) (0.2) (0.3)Cash inflow from borrowings 20.0 - 30.0-------------------- --------- --------- ----------Net cash used in financingactivities (5.5) (6.4) 12.0-------------------- --------- --------- ---------- Net decrease in cash and cashequivalents (119.3) (214.3) (148.9)Cash and cash equivalents atbeginning of period 154.5 303.4 303.4-------------------- --------- --------- ----------Cash and cash equivalents atend of period 35.2 89.1 154.5-------------------- --------- --------- ---------- Cash and cash equivalentsconsist of:Cash 89.2 77.6 79.4Short term deposits 41.0 87.0 115.0Bank overdraft (95.0) (75.5) (39.9)-------------------- --------- --------- ---------- 35.2 89.1 154.5 -------------------- --------- --------- ---------- 1. Basis of preparation These interim financial statements were approved by the Board on 22 September2005. They are unaudited, and do not comprise statutory accounts within themeaning of Section 240 of the Companies Act 1985. The results for the half year to 30 July 2005 have been prepared using thediscrete period approach, considering the half year as an accounting period inisolation. The tax charge is based on the effective rate estimated for the fullyear, which has been applied to the profits in the first half year. The group's published financial statements for the year ended 29 January 2005have been reported on by the group's auditors and filed with the Registrar ofCompanies. The report of the auditors was unqualified and did not contain astatement under Section 237 (2) or (3) of the Companies Act 1985. International Financial Reporting Standards Prior to 30 January 2005 John Lewis plc ("the group") prepared its consolidatedfinancial statements under UK Generally Accepted Accounting Principles (UKGAAP). From 30 January 2005 the group is required to prepare its consolidatedfinancial statements in accordance with International Financial ReportingStandards (IFRS), as adopted by the European Union and implemented in the UK.The group's date of transition to IFRS is 1 February 2004, and the 2004/05comparatives have been restated to IFRS. On 19 September 2005 John Lewis Partnership plc, the company's parent, publishedan explanatory report entitled 'Restatement of Financial Information underIFRS', which is available on the group's website, johnlewispartnership.co.uk.This document sets out the key differences between UK GAAP and IFRS for thegroup, reconciliations of its income statement for the year ended 29 January2005 and its balance sheets at 1 February 2004 and 29 January 2005, togetherwith its principal accounting policies under IFRS. With the exception of thereclassification of preference stock, the same adjustments apply to John Lewisplc. Accounting policies The group's results for the half year to 30 July 2005 have been prepared on abasis consistent with the group's accounting policies set out in note 2. Theseaccounting policies reflect IFRS and interpretations that are expected to beapplicable to the group for its 2005/06 financial statements. It is possiblethat there will be changes to these standards and interpretations before the endof the group's 2005/06 financial year, which might require adjustments to thisinformation before it is included in the 2006 Report & Accounts. In addition thegroup has adopted early an amendment to IAS 19 - Employee Benefits permittingimmediate recognition of actuarial gains and losses directly in reserves, on thebasis that this is expected to be formally adopted by the European Union beforethe end of the 2005/06 financial year. First time adoption The general principle that should be applied on first time adoption of IFRS isthat standards are applied with full retrospective effect. In accordance withIFRS 1, First-time Adoption of International Financial Reporting Standards, thegroup is able to take advantage of a number of exemptions in order to simplifythe transition. The group has elected: • not to apply IFRS 3 retrospectively, and therefore has not restated any past business combinations. Goodwill in respect of acquisitions before 1 February 2004 will remain as stated under UK GAAP; • to adopt revalued amounts on transition for its freehold land and buildings, and long leasehold buildings, except for certain properties, and to retain previous UK GAAP carrying values for all other assets. These values are treated as deemed cost on 1 February 2004; • to recognise in the opening balance sheet all cumulative actuarial gains and losses with respect to defined benefit schemes as at 1 February 2004; • to defer for one year the adoption of IAS 32 - Financial Instruments: Disclosure and Presentation and IAS 39 - Financial Instruments: Recognition and Measurement. Therefore within the July 2004 and January 2005 IFRS financial statements, financial instruments continue to be accounted for and presented in accordance with UK GAAP. The effect of adopting IAS 32 and 39 is shown as a movement in equity as at 30 January 2005. This resulted in a reduction in equity of £5.5m. Impact of transition Reconciliation of income from UK Half year Year GAAP to IFRS ended ended (net of deferred tax effects) 31 July 29 January ---------------------- 2004 2005 £m £m --------- --------- --------- ---------------------- Profit retained under UK GAAP 50.7 70.3 Pensions and employee benefits (4.4) (2.8) Property valuation 7.7 14.4 Finance leases and operating lease inducements (1.5) (3.0) Impairments 1.1 2.3 Intangible assets 4.2 6.0 ---------------------- --------- --------- --------- Profit retained under IFRS 57.8 87.2 ---------------------- --------- --------- --------- Actuarial losses under defined benefit schemes (54.4) (60.7) Tax on items recognised directly 16.3 18.2 in equity Profit for the financial period 57.8 87.2 ---------------------- --------- --------- --------- Total recognised income and expense under IFRS 19.7 44.7 ============================= ========= ========= Reconciliation of net assets from 1 31 July 29 January UK GAAP to IFRS February 2005 (net of deferred tax effects) 2004 2004 ---------------------- £m £m £m --------- --------- --------- ---------------------- Net assets under UK GAAP 1,541.4 1,592.0 1,611.5 Pensions and employee benefits (321.5) (363.9) (366.7) Property valuation 79.2 86.9 93.7 Finance leases and operating lease inducements (30.8) (32.3) (33.9) Impairments (21.8) (20.7) (19.5) Intangible assets 17.5 21.6 23.4 ---------------------- --------- --------- --------- Net assets under IFRS 1,264.0 1,283.6 1,308.5 ====================== ========= ========= ========= Adoption of IAS 32 and IAS 39 (5.5) Net assets at 30 January 2005 under IFRS 1,303.0 ========= ========= ========= ====================== 2. Accounting policies Gross sales and revenue Gross sales are the amounts receivable by the group for goods and services supplied to customers, net of discounts but including sales of goods purchased by the group on a sale or return basis and VAT. Revenue is gross sales, net of adjustments for the sale of goods purchased by the group on a sale or return basis, and VAT. Sales of goods and services are recognised as revenue when the goods have been delivered or the services rendered. Revenue in respect of 'sale or return sales' is stated at the value of the margin that the group receives on the transaction. Staff discounts are deducted from revenue. Revenue is recognised in respect of sales under bill and hold arrangements when the goods are segregated for the customer's benefit and made available for delivery. Sales of gift vouchers are treated as future liabilities, and revenue is recognised when the gift vouchers are redeemed against a later transaction. Stocks Stocks are stated at the lower of cost, which is generally computed on the basis of selling price less the appropriate trading margin, and net realisable value. Stocks exclude merchandise purchased by the group on a sale or return basis, where the group does not have the risks and rewards of ownership. Pensions and other employee benefits The group's principal retirement benefit scheme is a defined benefit pension fund with assets held separately from the group. The cost of providing benefits under the scheme is determined using the projected unit credit actuarial valuation method. The current service cost and gains and losses on settlements and curtailments are included in pension costs in the consolidated income statement. Past service costs are similarly included where the benefits have vested, otherwise they are amortised on a straight line basis over the vesting period. The expected return on assets of funded defined benefit pension plans and the imputed interest on pension plan liabilities are also recognised in pension costs. Differences between the actual and expected return on assets, changes in the retirement benefit obligation due to experience and changes in actuarial assumptions are included in the Statement of Changes in Equity in full in the period in which they arise. There are a number of unfunded pension liabilities, where the actuarially assessed costs of providing the benefit is charged to the income statement. There are no assets supporting these arrangements. The group has a scheme to provide up to six months paid leave after 25 years service. The cost of providing the benefits under the scheme is determined actuarially, and included in pension costs in the consolidated income statement. Property, plant and equipment The group's freehold and long leasehold properties were last valued by the directors, after consultation with CB Richard Ellis, Chartered Surveyors, at 31 January 2004, on the basis that each property is regarded as available for sale on an existing use basis in the open market. The group has decided not to adopt a policy of revaluation for the future. These values have been incorporated as deemed cost, subject to the requirement to test for impairment, in accordance with IAS 36. Other assets are held at cost. Depreciation No depreciation is charged on freehold land, and assets in the course of construction. Depreciation is calculated for all other tangible assets to write off the cost or valuation, less residual value, in equal annual instalments at the following rates: Freehold and long leasehold buildings - 2% to 4% Other leaseholds -over the remaining period of the lease Buildings fixtures - 2.5% to 10% Fixtures and fittings - 10% to 33% Property residual values are assessed as the price in current terms that a building would be expected to realise, as if it were at the end of its useful economic life. The assets' residual values and useful lives are reviewed at least at each balance sheet date. Intangible assets Intangible assets, comprising both purchased and internally developed computer software, are carried at cost less accumulated amortisation and any impairment losses. The cost of internally generated software, including all directly attributable costs necessary to create, produce and prepare the system for use, is capitalised where the development meets the criteria for capitalisation required by IAS 38. Internally generated software assets that are not yet in use are reviewed at each reporting date to ensure that the development still meets the criteria for capitalisation, and is not expected to be aborted or become impaired. Once available for use, the purchased or internally generated software is amortised over its useful economic life, which is estimated to be between 3 and 7 years. Leased assets Assets used by the group which have been funded through finance leases on terms that transfer to the group substantially all the risks and rewards of ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Leases where the group does not retain substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease rental payments, other than contingent rentals, are recognised as an expense in the income statement on a straight line basis over the lease term. Rentals payable under operating leases are charged to the income statement on an accruals basis. Taxation The charge for current income tax is based on the results for the year as adjusted for items which are not taxed or disallowed. It is calculated using tax rates in legislation that has been enacted or substantively enacted by the balance sheet date. Deferred income tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax arising from the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss, is not recognised. In principle, deferred tax liabilities are recognised for all other taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to shareholders' equity, in which case the deferred tax is also dealt with in shareholders' equity. Goodwill Goodwill represents the excess of the cost of a business combination over the group's share of the fair value of identifiable net assets of the business acquired at the date of acquisition. Prior to February 1998 goodwill arising on the acquisition of subsidiaries was written off to reserves at the time of acquisition. The group has taken the IFRS 1 exemption not to restate goodwill on previous acquisitions, and so this treatment will not be changed. Insurance The group's captive insurance company, JLP Insurance Limited, provides reinsurance of the group's employers, public and vehicle third party liability insurances, and of the group's healthcare insurance cover. It also insures ServicePlan Limited, and reinsures Landmark Insurance Company Limited, third party providers of extended warranty products to customers of John Lewis. For the liability insurances, the results of each underwriting year are estimated at the year end using independent actuarial assessments, when any profits or losses arising are recognised. Other classes are also accounted for on an annual basis, with unearned premiums attributed to unexpired periods of insurance at the year end. Impairment Assets that are subject to amortisation are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount, the latter being the higher of the asset's fair value less costs to sell and value in use. Value in use calculations are performed using cash flow projections, discounted at a pre-tax rate which reflects the asset specific risks and the time value of money. Exceptional items Items which are both material and non-recurring are presented as exceptional items within their relevant consolidated income statement category. The separate reporting of exceptional items helps provide a better indication of the group's underlying business performance. Events which may give rise to the classification of items as exceptional include gains or losses on the disposal of properties, restructuring of businesses and asset impairments. Provisions Provisions are recognised when the group has an obligation in respect of a past event, it is more likely than not that payment (or a non cash settlement) will be required to settle the obligation and where the amount can be reliably estimated. Provisions are discounted when the time value of money is considered material. Partnership bonus Partnership bonus, determined in relation to the results for the previous financial year, is paid to Partners each March. No provision is made for Partnership bonus at the half year stage as the majority of the group's profit is earned in the second half year and, until the annual profit is known, it is not possible to make an estimate of the liability. A provision for this bonus is included in the year end accounts, with the amount confirmed by the Board shortly after the year end. Capital instruments Finance costs in respect of debt are capitalised and amortised over the life of the debt at a constant rate. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short term deposits. In the consolidated cash flow statement, cash and cash equivalents comprise cash and cash equivalents, as defined above, net of bank overdrafts. Foreign currencies Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Foreign currency assets and liabilities held at the year end are translated into sterling at the rate of exchange ruling at the balance sheet date. Financial instruments Up to 29 January 2005: The group uses derivative financial instruments to manage its exposures to fluctuations in foreign currency exchange rates and interest rates. Derivative instruments used by the group are primarily interest rate swaps and forward currency contracts. Amounts payable or receivable in respect of interest rate swaps are recognised as adjustments to the interest charge over the period of the contract. Forward currency contracts are accounted for as a hedge by recording the associated purchase at the forward rate, with the instrument's impact on profit deferred until the underlying transaction is recognised in the profit and loss account. After 29 January 2005: The group uses derivative financial instruments such as foreign currency contracts to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are measured at fair value. The gains or losses on remeasurement are taken to the income statement. The fair value of a derivative financial instrument represents the difference between the value of the outstanding contracts at their contracted rates and a valuation calculated using the forward rates of exchange prevailing at the balance sheet date. Gains or losses on fair value hedges that are regarded as highly effective are recorded in the income statement along with the gain or loss on the hedged item attributable to the hedged risk. Hedge accounting is discontinued when the hedging instrument expires, is sold, terminated or exercised, the designation is revoked or it no longer qualifies for hedge accounting. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the income statement. Offsetting (after 29 January 2005 only) Balance sheet netting only occurs to the extent that there is the legal ability and intention to settle net. As such, bank overdrafts are presented in current liabilities to the extent that there is no intention to offset with any cash balances. 3. Exceptional operating expenses ---------------------- --------- --------- --------- Exceptional operating expenses Half year Half year Year to 29 comprise the following (charges) to to 31 July January and credits: 2004 2005 30 July ---------------------- 2005 £m £m £m --------- --------- --------- ---------------------- Operating expenses: Asset impairments - - (6.2) Asset write offs - - (1.3) Reorganisation costs - (2.5) (2.6) Gain on disposal of account card operation - 2.6 5.4 Gain on property disposals - 12.6 21.2 ---------------------- --------- --------- --------- - 12.7 16.5 ---------------------- --------- --------- --------- 4. Reconciliation of net cash flow to movement in net debt ---------------------- --------- --------- --------- Half year Half year Year to 29 to to 31 July January 2004 2005 30 July 2005 £m £m £m ---------------------- --------- --------- --------- Net decrease in cash and cash equivalents (119.3) (214.3) (148.9) Cash inflow from borrowings (20.0) - (30.0) ---------------------- --------- --------- --------- Movement in net debt (139.3) (214.3) (178.9) Opening net debt (375.5) (196.6) (196.6) ---------------------- --------- --------- --------- Adoption of IAS 32 and IAS 39 (5.7) - - ---------------------- --------- --------- --------- Closing net debt (520.5) (410.9) (375.5) ---------------------- --------- --------- --------- For further information: John Lewis Partnership Paul Burden, Director of Communications Tel: 020 7592 6292 Helen Dickinson, Head of Press & PR Tel: 020 7592 6274 Helen Megaw, Corporate Press Manager Tel: 020 7592 6223 Hogarth Partnership James Longfield/Georgina Briscoe Tel: 020 7357 9477 Notes To Editors The John Lewis Partnership (www.johnlewispartnership.co.uk) is one of the UK's top ten retail businesses with 27 John Lewis department stores and 167 Waitrose supermarkets. It is also the country's largest example of worker co-ownership with all 63,000 staff being Partners in the business. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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