Tesco results: Three things you need to know after today's annual loss announcement

Lynsey Barber
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Tesco has shocked with the size of losses (Source: Getty)

Tesco's results are out and there's a lot to take in - market reaction had been mixed this morning, initially up and now largely flat.

Here are the three key things you need to know about Tesco this morning after shock losses at the supermarket.

1. How huge? This huge

To put Tesco's £6.38bn loss in context, it's the sixth largest loss of any company in the UK. Cable & Wireless had losses of £6.4bn in 2003, Lloyds HBOS £10.8bn in 2009, £13.5bn and another £14.9bn by Vodafone in 2002 and 2006 respectively, and finally, it's a long way off the £24.1bn losses reported by RBS in 2009.

In terms of retailers, however, it takes the biscuit, dwarfing any former losses of rivals Morrisons, Sainsburys and high street stalwarts Home Retail Group (owner of Argos) and Dixons.

Most of the loss came from one-off writedowns, largely from property rather than trading, which has eased investor fears. Essentially Tesco's properties are worth less than previously thought.

2. The issue of a rights issue

Dave Lewis has once again ruled out a rights issue to raise cash, preferring to get that from selling off assets to reduce its debts at this point in time

A major asset on the table is data arm Dunnhumby, the brains behind its Clubcard loyalty scheme, which Lewis says a review of its "strategic options" of the business are "well advanced". That alone could net Lewis a couple of billion in the bank.

"Our aspiration is to maintain the profit level at what it was last year but you should understand that if we feel we have to make further investments to keep the momentum of the business going ... we would," said Lewis.

3. What about 2016 and beyond?

As Dave Lewis said, it's still challenging out there.

The trend for the full year was a smaller loss in the second half of the year compared to the first half, and like-for-like sales in the fourth quarter were the most positive in four years.

Trading figures could still be downgraded, however, despite a more positive trend in sales in the fourth quarter, according to Shorecap's Darren Shirley. "We have been bottom of the consensus range on our full year 2016 UK trading numbers and reading management’s assessment of its priorities, particularly reinvestment of cost savings and gains leads us to be comfortable with this position; there could be market downgrades on UK trading figures after this update," he said.

Tesco is capping its capital expenditure at £1bn, well below its previous levels as Lewis reins in costs - every little helps. A commitment to paying into the supermarket's pension pot is also a positive move.

Cantor's Mike Dennis believes Tesco should close another 200 stores and close a distribution centre to save £40m, as well as reducing its range and staff numbers.

"Tesco UK, in our view, has only just started to address its staff and rental costs (est. £870m rental costs in 2014/15) and implement a trading strategy to produce sales volumes, that justify additional supplier income and a higher margin. However, any recovery to three per cent+ UK trading margins still looks three years away," he said.

Dismissing the writedown, which is a one-off non-cash charge, Tesco turned a £1.4bn profit. That's a fall on last year's £3.3bn but far off trading losses.

As Dave Lewis told investors "if we can make Tesco better tomorrow than it is today, we're fine".

Accendo's Mark Kimsey is negative about the outlook, however. "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 per cent increase in the share price this year will provide a platform to short sell from. A return to sub-200p pricing looks inevitable."

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