Tesco announces “shocking” historic loss of £6.4bn

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Tesco has posted a £6.4bn annual loss, following months of speculation as to the size of its impending writedown.

As reported by Your Money, on Monday analysts forecasted that Tesco could post pre-tax losses in the low billions. However, while Clive Black of Shore Capital predicted that today’s announcement would be a “horror show”, few if any were prepared for the true scale of the loss; although, Margaret Lawson of SVM Growth identified overvaluation of the company’s property portfolio as a major issue facing the retailer.

The loss is the largest in the century-long history of Tesco, and one of the largest in UK corporate history; overvaluation of the company’s property portfolio accounted for a £3.8bn writedown, and the closure of 43 stores. The termination of ongoing projects accounted for a loss of £925m, and means 49 ‘in-progress’ sites will now not proceed. Last year, the retailer posted a profit of £2.26bn.

“The market is still challenging and we are not expecting any let-up in the months ahead,” commented Dave Lewis, chief executive of Tesco. “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.”

“Our clear priority 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.”

The results provoked a frenzy of reaction from analysts. “To say that Tesco had a nightmare year would be an under-statement,” said Clive Black. “The whys and wherefores of how Tesco reached this somewhat unedifying position have been well documented to our minds. The key take-away for investors should be ‘what of the future’.”

John Ibbotson of Retail Vision said the results were proof that “the retail world is changing,” and heralded “the official end of the Tesco era.”

The irony is that Tesco is on the right path. Dave Lewis has done all the right things, made all the tough decisions. He has changed the retailer’s entire corporate philosophy. But, there’s a long way to go yet before the new Tesco that becomes profitable again. Even when it does recover, it will never again be the force it once was. With this huge loss, the decadent retail dynasty of Tesco has come to an end.”

Marc Kimsey of Accendo Markets said the results disappoint “on every level”; “the pre-tax loss exceeds the City’s already dire expectations and the trading profit has fallen by almost 60 per cent in just a year.”

“Traders are now discounting positive management rhetoric regarding a turnaround plan,” Kimsey concluded. “Only the numbers will do now and sadly, they are not only disastrous, but deteriorating.”

However, Bruno Monteyne at Bernstein noted that “while headlines will be dominated by the loss,” there was some cause for mild relief. “The pension deficit has not expanded as much as some had feared, and trading performance in the UK continues to be solid.”

Ian Forrest of The Share Centre said that investors may take some comfort in the market’s reaction, noting that Tesco shares rose 2 per cent in early trading and remain above the 155p low seen last December. “The main reason,” Forrest explains, “is that there was relief that the figures were not even worse.”

“However, there was also a sense of the company attempting to clear the board and get all the bad news out of the way. The recovery is likely to take a long time, but there are some encouraging signs with UK trading improving in the second half of the year and a 20 per cent rise in the online grocery business.”

“We continue to recommend Tesco as a ‘hold’ for patient medium risk investors.”

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