People often say they are fortunate when they mean clever. Both Simon Wolfson, head of Next, and Sharon White, new head of John Lewis, talk of being fortunate. But Dame Sharon was unlucky in unveiling the retailer’s half-year results at the same time as Next’s.
Next made a pre-tax profit of £9m in the six months to July on a 33 per cent drop in sales and lifted forecasts for the full year to £300m. John Lewis made a half-year pre-tax loss of £55m (excluding exceptionals) on a 10 per cent drop in overall sales, despite a bumper contribution from grocer Waitrose.
Fair enough, the department store group makes most of its money around Christmas. Nonetheless, its net debt is mounting. It reckons it will surpass four times cash income this year. Dame Sharon wants it nearer three times.
That could take a while. Dame Sharon talks gamely of John Lewis as an omnichannel retailer. But it is not in the efficient way that Next is. Tellingly, John Lewis has written down the value of its store estate in recognition that its department stores drive far fewer customers to spend online than was thought. Stores might only contribute £3 to every £10 spent by customers online, it said on Thursday, not £6.
More than half of Next’s customers click and collect from its outlets. Four-fifths of returns are delivered through the stores, which helps keep costs down. John Lewis customers collect just 16 per cent from its stores. At 60 per cent, the proportion of its sales made online only equals Next’s rate before the pandemic.
While John Lewis’s debt is rising, Next expects to trim another £462m off its net debt, bringing it down to £650m by the year end.
Dame Sharon must tread carefully as well as cleverly. The partnership is constantly held up by the great, the good and politicians as the epitome of a kinder, more inclusive and modern form of capitalism, answerable to staff rather than shareholders. Staff won’t celebrate her kindness in cutting their bonus for the first time since 1948. Nor is it likely to be reinstated any time soon.
Dame Sharon must balance the need to instil new financial disciplines while espousing John Lewis’s purpose, which as she reiterated on Thursday is to tackle inequality, and improve sustainability and wellbeing. It is certainly a more complicated brief than Lord Wolfson’s. “The business comes first at Next,” he says. Dame Sharon might think she was luckier if her purpose was as clear cut.
Accounting for Autonomy
Autonomy is yesterday’s accounting scandal, Cat Rutter Pooley writes. Since Hewlett-Packard first made allegations about accounting improprieties at the former FTSE 100 tech darling, almost eight years have passed. There have since been accounting blow-ups at Tesco, Quindell, Carillion, Thomas Cook, Patisserie Valerie, NMC Health and Wirecard, to name but a few. HP’s astonishing $8.8bn writedown, only a year after buying Autonomy, has lost some of its power to shock.
But the Financial Reporting Council’s £15m fine for Deloitte over its audit work for Autonomy should still be a moment to sit up and take note.
It is a record for the FRC. Deloitte has to cough up £5.6m for the FRC’s legal fees too. It will no doubt have also racked up a sizeable legal bill of its own in that time. The sums are still small in the context of the Big Four’s profits: Deloitte UK reported pre-tax distributable profit of £617m (before partner payouts) in the year to June 2019. It’s not nothing, though. And the FRC at least has a better record of audit fines in recent years than its US equivalent, the Public Company Accounting Oversight Board.
The findings of misconduct against the Big Four firm and two of its then-partners, made by an independent disciplinary tribunal, are important. Deloitte and the partners made “serious and serial failures” of a type that can threaten to undermine public confidence in capital markets. They fell “seriously short” of the standards expected of auditors.
The danger when such investigations take so long to resolve is that firms can dismiss the findings as historic and irrelevant. The five years that the FRC spent was too long, though no doubt the case was complex. Both partners cited in the Autonomy case have left the firm. Deloitte’s statement on Thursday said that its “audit practices and processes have evolved significantly since this work was performed over a decade ago”.
That may be true. But the firm has yet to explain what went wrong and how it has fixed it. Rather than settle, as many firms do when presented with FRC findings against them, it has spent the past two years contesting the case through a tribunal. The passing of years has arguably been more of a positive for Deloitte than a negative.
The FRC is on its way out. It was already being dismissed as toothless when the Autonomy fiasco first kicked off. That reputation was sealed by John Kingman’s review in 2018. All the more reason to mark the occasion when it does conclude a case like this.
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