John Lewis: mutual would not be knowingly overvalued

Progress is often a case of necessity over choice. Steep losses and the need to restructure are threatening to drag John Lewis, a venerable UK retailer, into the modern world. To stay afloat, the employee-owned business may seek up to £2bn from a stake sale.

John Lewis operates department stores and the Waitrose grocery chain. Like Marks and Spencer, it is a historic touchstone of UK middle class life struggling with lower-cost competition.

Chair Sharon White began implementing a turnround plan in 2020. Rampant inflation has made targets much harder to hit. The business has some £1bn of cash. But the outlook is weak. Losses deepened to £234mn last year.

Waitrose’s market share losses outpaced all but Tesco and Wm Morrison in the year to January. Sales per employee were one-third lower than Tesco and a fifth below Sainsbury’s.

White has cut costs by £300mn over the past two years. She is seeking another £600mn of economies by 2026 from a top line that stood at £12.3bn last year. But this may conflict with the high priority John Lewis has always placed on customer service.

Any external investor would have to be comfortable with a corporate culture that includes big staff bonuses in good years and a form of worker democracy. Valuation is more straightforward.

Assume, optimistically, that the turnround works out, Waitrose might then achieve the same operating margin — 4.2 per cent — as M&S’s food division. At a UK grocer’s earnings multiple of 11.5 times, Waitrose would be worth £3.5bn. Assuming a 7 per cent margin for John Lewis and a peer group valuation multiple would price the department stores at £4.3bn for a group total of £7.8bn.

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Deduct net debt, and John Lewis might have to sell more than a quarter of its equity to raise the requisite £2bn.

The business and its numerous shop floor partners would then have an obligation to take the views of its big minority shareholder into account. With store and staff cuts on the agenda, it could prove an awkward relationship.