LONDON (Reuters) - Tesco (TSCO.L) revealed the cost of its spectacular decline on Wednesday with an annual loss of 6.4 billion pounds ($9.5 billion), one of the biggest in British corporate history, and warned investors there could be more pain to come.
The 96-year-old group, which dominated the British retail landscape for decades, wrote down the value of its business by 7 billion pounds, suffering in an industry price war sparked by the challenge from German discount chains Aldi [ALDIEI.UL] and Lidl [LIDUK.UL].
It reported a near 60 percent drop in 2014/15 trading profit and said it may struggle to hit even that level this year as it set out the work needed to claw back market share lost to fierce competition and recover from a damaging accounting scandal.
“We sought to draw a line under the past and rebuild from here,” said Dave Lewis, a former Unilever (ULVR.L) executive who has impressed investors with his decisive action since replacing sacked Tesco veteran Philip Clarke as CEO in September.
“There are some encouraging signs that what we’re doing is the right thing but we’re very much at the beginning of a journey.”
After two decades of uninterrupted growth, Tesco lost its way when it was distracted by expensive overseas expansion and failed to spot the threat from discounters at home. It was wrong-footed too by the popularity of local stores that took customers away from its huge out-of-town sites.
Lewis, dubbed “Drastic Dave” for his radical overhaul of Unilever businesses, has fought back with lower prices, more staff on the shop floor, streamlined product ranges and better customer service, boosting recent trading.
He is changing relationships with suppliers, the root cause of the accounting scandal being investigated by Britain’s Serious Fraud Office, pledging to cut the number of ways Tesco can derive commercial income from suppliers.
Lewis, who wants to make Tesco a simpler, more agile and lower cost business, raised his annual cost savings target to 400 million pounds at a one-off cost of 350 million pounds, after cuts to its European business and bank.
Tesco shares, which have risen by more than 18 percent this year, were down 4.7 percent at 1420 GMT. One institutional investor who declined to be named said the results were as ugly as feared.
“It’s every bit as grisly as people might have thought and more,” he said. “There’s really not very much to be excited or positive about at all.”
The full-year results showed the strains on the group’s finances, with its credit rating already cut to junk.
Net debt ballooned to 8.5 billion pounds, while the net pension deficit jumped to 3.9 billion pounds from 2.6 billion pounds. The company has agreed to pay 270 million pounds per year into the scheme to help make up the shortfall.
Tesco wrote down the value of its property by 4.7 billion pounds, and gave no indication of when scrapped dividend payments might resume.
Tesco’s property writedown follows similar moves by rivals Sainsbury’s (SBRY.L) and Morrisons (MRW.L) and reflects the deterioration in British supermarket conditions in recent years and the growth of online shopping.
One-off charges aside, Tesco’s trading profit was 1.4 billion pounds, in line with expectations but less than half the 3.3 billion pounds made the year before.
Lewis, spearheading a new management team that will be bolstered by the arrival of former Halfords (HFD.L) boss Matt Davies as UK CEO next month, could not guarantee Tesco would hit that profit level this year due to the investment required to get sales rising, such as further price cuts.
“Actually getting our profit back to the (2014-15) level... isn’t a walk in the park,” he said.
To reduce debt Lewis has set out plans to sell some assets although he has repeatedly said that Tesco’s funding levels are secure and there is no need for any fire sale.
He said the firm was moving closer to a deal regarding its data-gathering arm Dunnhumby and had a clear idea about the future of the rest of its portfolio. According to a source, Tesco is aiming to sell a majority stake in Dunnhumby, valued by analysts at 1-2 billion pounds.
The results did also show some signs of improvement, with like-for-like sales in its home market, excluding fuel and VAT sales tax, down 1.2 percent in the fourth quarter, from a fall of 4.4 percent in the previous three months. Like-for-like volumes were up for the first time in over four years.
However, full year trading profit slumped 79 percent in the UK, was down 15.3 percent in Asia, a previous driver of growth, and down 31 percent in Europe.
“To say that Tesco had a nightmare year...would be an under-statement,” said Shore Capital analyst Clive Black.
“Whilst the challenges are considerable and that there is no quick fix ...we are pleased with the management team that has been put into place, which gives us some confidence of improvement and better times ahead.”
Writing by Kate Holton; editing by Guy Faulconbridge and Keith Weir