22nd Apr 2015 13:31
LONDON (Alliance News) - Tesco PLC Wednesday said it swung to a big loss in its last financial year, after booking a staggering GBP7.0 billion of impairments, writedowns and restructuring charges, as it tried to put a difficult year behind it and get back on track in a revamp that new Chief Executive Dave Lewis admitted is going to take a long time.
The UK's largest retailer had been growing strongly for decades, but hit the buffers last year as the UK's supermarket sector was hit by growing competition from the discount sector. That exposed Tesco to a mounting slowdown in sales, meaning its aggressive treatment of suppliers was exposed and it was forced to admit it had overstated profits in recent years by booking revenue too early.
It has now completely changed management, and Lewis has embarked on a massive restructuring project, selling off some of the businesses that the company had expanded into as it diversified away from its main grocery business, slashing costs, closing unprofitable stores, and cutting Tesco's spending plans and its dividend as he tried to shore up the balance sheet.
Tesco reported a pretax loss for the year ended February 28 of GBP6.38 billion, compared with a profit of GBP2.26 billion a year earlier, as it booked GBP5.61 billion of impairments, mainly on its property portfolio, GBP570 million of stock-related charges, GBP416 million in restructuring costs, and a GBP208 million adjustment accounting for profit overstatements in previous years.
Included in the impairments was a GBP925 million charge after Tesco decided not to proceed with plans to develop 49 sites in its property pipeline, a GBP630 million charge relating to its investment with China Resources Enterprise Ltd, GBP116 million relating to its Dobbies garden centre business and other UK businesses, and an impairment of GBP82 million principally relating to the strategic decision to slow the roll-out of the Harris+Hoole coffee shops and the Euphorium bakery sites.
Its closely-watched trading profit, which excludes the one-off items, dropped by 59% to GBP1.39 billion as revenue fell to GBP62.3 billion, from GBP63.6 billion the year before, although it said UK like-for-like sales volumes were up for the first time in over four years, driven by better availability, service and pricing.
For the year as a whole, Tesco's like-for-like UK sales excluding fuel fell 3.6%, but it said its investments into improving its offer meant the position improved in the second half of the year, with like-for-like sales down 1.0% in the fourth quarter despite the improvement in volume.
Matt Davies will take up his role as chief executive of the UK business on May 11, earlier than originally anticipated, Tesco said.
Lewis said reinvestment will be key to the company's success going forward, as he admitted that rebuilding the business will take a long time.
?To rebuild our profit this year, even back to the level of what we achieved last year, isn?t without its challenges,? he told journalists. ?We?ve got a long, long way to go and I don?t think it will be smooth as we walk through the changes we want to make?.
In the face of growing competition from German discount grocers Aldi and Lidl, the big four UK supermarkets, of which Tesco is the largest, have been cutting prices and also simplifying their pricing structure. The retailers have been accused of confusing shoppers with deals like buy-one-get-one-free, deals that the growing discounters don't use.
Tesco said it has made a string of price cuts to branded products as well as essential products like bread and butter, saying that it will review each of its product ranges over an 18-month period to "simplify, further improve availability and set lower, more stable prices".
Tesco added that the majority of its initial annual cost savings of GBP250 million will be reinvested in 2015-16, and a further GBP150 million in savings have been identified.
The transformation programme to try and turn the business around is progressing well and the portfolio review is ongoing, Tesco said, adding that over the next 12 months it will continue to focus on its three priorities of regaining competitiveness in the UK business, protecting and strengthening the balance sheet, and rebuilding trust and transparency in the business and the brand.
As part of the supermarket chain's turnaround plans, it has added 4,652 customer-facing roles to its UK stores since September, while axing 2,400 head office jobs, and closing 43 unprofitable stores earlier this month. It also completed an asset swap with British Land in March to regain sole ownership of 21 superstores.
Tesco also said that it has agreed a pension deficit funding plan with its trustee, comprising cash contributions of GBP270 million a year, adding that it has launched a consultation with colleagues to replace the defined benefit pension scheme with a defined contribution scheme. This comes after some analysts said Tesco would need to raise cash to plug a GBP5 billion hole in its pension fund.
The supermarket chain confirmed that it will not pay a final dividend for the year, and said it will consider future dividends within the context of the group's performance, free cash flow generation and the level of indebtedness.
It confirmed plans to reduce capital expenditure for the current year to GBP1 billion and said it is undertaking a comprehensive review of its property portfolio.
All three Blinkbox businesses - movies, music and books - and Tesco Broadband were sold or closed during the year, and the review of strategic options for the Dunnhumby business is "well-advanced", according to Tesco.
The 'Supplier Helpline' was also launched in March to help build longer term, mutually beneficial partnerships with its suppliers, Tesco said.
"The market is still challenging and we are not expecting any let up in the months ahead. When you add to this the fundamental changes we are making to our business and our offer, it is likely to lead to an increased level of volatility in short-term performance," Lewis said in a statement.
"Our clear priority - and the one that will deliver sustainable value for our shareholders - is to improve consistently for customers. The changes we have made and will continue to make put us in a stronger position to do this," he said.
Tesco is also struggling abroad, with trading profit down 18% in Asia and 32% in the rest of Europe. It said it was being hit in South Korea by regulations that have led to a higher number of enforced Sunday closures and increased restrictions on morning trading hours. It said a recovery in consumer spending in Thailand since the recent political unrest has been slower to materialise than it hoped, while it has been hit by the weak economic situation and protests against some Western-owned businesses in Malaysia.
Trading results in Europe were behind its expectations, even though its like-for-like sales improved slightly in the fourth quarter. It has also been hit by strong competition from discount retailers in Ireland, where like-for-like sales fell 6.3%. The fall in the euro against the pound also weighed on the results for the region when translated into sterling.
Shore Capital said the supermarket's results "do not make for a pleasant read for any long-standing investors in Tesco" but says it is happy with the management team at the helm.
"Whilst the challenges are considerable and that there is 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," said Shore analyst Clive Black.
However, Cantor Fitzgerald analyst Mike Dennis believes there is more bad news to come.
"Tesco UK, in our view, has only just started to address its staff and rental costs and implement a trading strategy to produce sales volumes, that justify additional supplier income and a higher margin," Dennis said.
Analysts noted that Lewis' plan to reinvest savings into the offering to boost volumes was likely to weigh on margins for the foreseeable future.
"Tesco's focus on volume recovery is clear ? if achieved, this could transform the perception of its growth profile. However, it also has cautionary implications for its own margins and (potentially) those of the industry," said Barclays analyst James Anstead. "The prominence of the reinvestment commitment may temper any belief that margins will recover overnight."
Shares in Tesco were trading down 4% at 225.38 pence Wednesday afternoon, making it the worst performing stock in the FTSE 100. The stock had risen initially after the results.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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