Tesco full year results reveal record £6.4bn loss

Full-year results from Tesco showed a larger than expected pre-tax loss of £6.4bn - the biggest in retail history - as well as a ravaged balance sheet as chief executive Dave Lewis looked to "draw a line under the past".

Traders and analysts had predicted a £5bn loss at the worse end of expectations, but £5.6bn of impairments was bigger than expected, with almost £1bn of stock-related charges and restructuring costs also hitting heavily.

Read more: UK supermarket sector to face major grocery pricing probe by CMA

Although the grocer looked to draw positives from a target-meeting £1.4bn group trading profit and like-for-like sales improving in the fourth quarter, eyes were drawn to a kitchen-sinking £7.0bn of write-offs, total indebtedness of nearly £22bn and a pension deficit just shy of £4bn. Net debt stood at £8.5bn.

a kitchen-sinking of the balance sheet saw £7.0bn of write-offs, total indebtedness rose to nearly £22bn and the pension deficit expanded to almost £4bn

A pension deficit funding plan has been agreed with the trustees, but cash contributions of £270m per year are higher than expected.

For the year to 28 February Tesco reported group sales down 3% to £69.7bn, with the abovementioned trading profit down 58%, with UK trading profits down 79%, Asia down 18%, Europe down 32% and Tesco Bank flat.

Underlying profit before tax, write-offs and several other charges, was down 68.4% to £961m, with underlying earnings of 9.42p per share. The final dividend, as had be warned, was withdrawn.

UK like-for-like sales were down 3.6% for the year they improved to be down just 1% in the fourth quarter

The UK business operated at a loss throughout second half of 2014, but though UK like-for-like sales were down 3.6% for the year they improved to be down just 1% in the fourth quarter.

This was driven, the grocer said, by sales volumes rising for first time in over four years, driven by better product availability, customer service and investment in pricing.

UK like-for-like sales were down 3.6% for the year but improved to a 1% fall in the fourth quarter

"It has been a very difficult year for Tesco," understated Lewis. "The results we have published today reflect a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years."

The UK supermarket has erupted into an all-out price war, sparked by the rise of the discounters Aldi and Lidl, eroding margins at the sector's heavyweights.

The plan to protect and strengthen the balance sheet includes capping capital expenditure for 2015/16 at no more than £1bn, January's sale of Blinkbox and a review of its in-demand Dunnhumby data arm.

A thorough review of the property portfolio saw a £4.7bn impairment charge, but the value of fully-owned property stood at £22.9bn at year-end, higher than the company's current market cap.

Having begun to address the UK business, Lewis has also decided to radically overhaul Tesco's European operations, with the Eastern European arm now run from one office rather than the previous four.

ANALYSTS ATTACK

While some hints of a turnaround were welcomed, the City was, unsurprisingly, unimpressed with the results.

"The 30% increase in the share price this year will provide a platform to short sell from."

"Yet another shocker from Tesco," said senior trader Marc Kimsey at Accendo Markets.

"Traders are now discounting positive management rhetoric regarding a 'turnaround plan'. Only the numbers will do now and sadly, they are not only disastrous, but deteriorating. The 30% increase in the share price this year will provide a platform to short sell from. A return to sub-200p pricing looks inevitable."

Clive Black at Shore Capital added: "To say that Tesco had a nightmare year in FY2015 would be an under-statement, an out-turn that would simply have been unfathomable in days gone by...Turning to the results, it does not make for a pleasant read for any long-standing investors in Tesco shares."

Alex Joyner at Galvan noted that the £6.38bn loss was the worst in Tesco’s 97-year history and highlighted the true magnitude of the grocer's problems.

"'Drastic' Dave Lewis says the turnaround plans are working, but investors are hardly going to feel reassured this morning. The collapsing value of its property portfolio has hit the balance sheet harder than expected. Worryingly, the pension black hole has continued to grow and could hit future profitability."

He expressed concern for how Tesco can win back market share with the industry's price wars fiercer than ever and the discounters "cleaning up".

Yet as the London Stock Exchange opened on Wednesday the shares began to trade higher.

Writing after the opening bell, CMC's Michael Hewson said while the record losses may well have been more than markets expected "but in a way they are also encouraging, as they signal a determination by management to clean the slate and get on with turning the business around, and drawing a line under a pretty awful last couple of years".

"The market certainly seems to think so, given that Tesco remains the UK’s biggest supermarket in terms of size, floor space and purchasing power, and while the young pretenders of Aldi and Lidl are undoubtedly eating its lunch, they look like they starting to run up against the limits of their capacity."

Simon Johnstone at Kantar Retail was also optimistic about the planned recovery strategy that he felt "promises to steer the retailer back on course".

"shoppers could soon have a reason to return to Tesco – potentially heralding the revival of the supermarket chain"

He liked the look of Lewis's three-pronged attack to centred on strengthening the balance sheet, repairing its reputation and rebuilding the brand. "We expect to see more subletting initiatives to third parties, such as Sports Direct. Downsizing is essential – especially cutting loose any non-profitable aspects of the business."

He added that Tesco's brand was still in need of updating but that with the planned investments to increase shop floor staff, better availability of products, a simplified product range and a lower and consistent message on price, "shoppers could soon have a reason to return to Tesco – potentially heralding the revival of the supermarket chain".

ShoreCap's optimistic Black also saw light at the end of the tunnel, though he acknowledged that the challenges were considerable and that there was no quick fix to Tesco's problems, with "little or no hope to our minds of achieving the performance levels of halcyon days of old".

"We are pleased with the management team that has been put into place, which gives us some confidence of improvement and better times ahead."

However, he said this did not necessarily offer scope for material share price advancement in the short term, as the stock has already re-rated to reflect an expected recovery yet the business has little prospect of income support and "first needs to demonstrate that trading is improving on an ongoing basis and that better times are ahead".

VIDEO: CEO Dave Lewis and CFO Alan Stewart interviewed on results (by a Tesco employee)