Tesco’s annual losses spiralled as consumers deserted the embattled retailer and forced it to write down the value of its stores. However, the company is showing signs of hope for the future and may be able to move on, according to a market analyst.
Hit by an accounting scandal and a price war with major retailers Morrisons, Sainsbury and Asda as well as discounters Aldi and Lidl, Britain’s biggest retailer wrote down the value of its business by £7bn (€9.76bn) to reflect restructuring charges and the lower sales across its stores.
Around £4.7bn of its losses were because of the fall in the property value of its UK stores, 43 of which it said would close earlier this month.
“To say that Tesco had a nightmare year in 2015 would be an under-statement, an outturn that would simply have been unfathomable in days gone by,” said Clive Black an analyst at Shore Capital.
The firm also reported a net debt of £8.5bn (€11.85bn) and a net pension deficit of £3.9bn (€5.44bn). It has agreed a deficit funding plan with trustees to make cash contributions of £270m (€376.55m) per year to help make up the shortfall.
Tesco’s chief executive Dave Lewis admitted it had been a very difficult year for Tesco. “The results we have published today reflect a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years.”
However, he added that the company had faced up to the reality and had begun to rebuild – adding that the firm is already beginning to see early encouraging signs. “More customers are buying more things at Tesco,” added Lewis.
Road to recovery
Richard Perks, director of retail research at Mintel said that losses aside, what matters more is that the business made an operating profit of £1.4bn (€1.95bn), though it broke even or slightly worse in the UK in the second half.
“The company obviously hopes that that will mark the low point and that it can move on from now... Tesco needed to invest in cost in the stores and it has done so and it is paying off,” said Perks.
A need for patience
The results were a stepping stone and not a definitive event that outlined the direction of travel and extent of Tesco in the future, said Black.
Since Tesco was over-leveraged -- with a combined £21.7bn of net debt, operating lease commitments and pension deficit -- it needed to materially de-leverage. How it would do so had however, not yet been set out by the company -- be it a mix and match of disposals or equity fund raise.
“As such Tesco is setting its own agenda and we sense it will update the market when it is ready, noting that there are no immediate liquidity constraints. We do expect disposals and/or a capital raise,” said Black.
CEO revives faith
Tesco shares rose 1.3% to 238p in morning trading and have gained 25% this year after Lewis joined the company as chief executive. “I think he has done the right things and customers are rewarding him by shopping at Tesco more. Customer transactions are up and so are sales volumes,” said Perks.
“[He] hasn't put a foot wrong since he started in our view,” added Black.