Tesco: Here's what the City and analysts are saying about record annual losses

 
Lynsey Barber
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The City is digesting Tesco's results (Source: Getty)

As the details of Tesco's losses and its turnaround plans sink in around the City, here's the initial take from analysts, business experts and even the man funding shareholder litigation against Tesco over the profit overstatement last year that triggered it all.

Louise Cooper, CooperCity - "Tesco is like Miliband - it has two kitchen sinks"

"As I have written before, the supermarket groups have insufficient margin to compete - their costs bases are way too high. Aldi and Lidl are still at least 25 per cent cheaper than the big four (according to my latest analysis). Tesco has closed the gap marginally but it is only marginal. And while that large gap persists the competitive threat continues. Being 10 per cent more expensive for better service or choice is doable, but a 25 per cent premium is just too large. It makes customers think they're being ripped off. And even for those that would never shop in the discounters, Aldi and Lidl pull down perceivable price points.

But Tesco has to wait until it has taken out costs and is financially stronger until it can really compete. 'Balance sheet strength is a priority' translates into we are heavily indebted, not making any profit and our debt is now rated as junk by the credit rating agencies. But shareholders will want to see a trading turnaround in place before they stump up new cash for a rescue rights issue. "

Peter Hahn, Cass Business School

“So much of the coverage of Tesco’s whopper of write-off and loss seems to be on the non-cash aspects of the writedown, but this really misses the point.

Firstly, there’s more than £5bn of disappearing assets that Tesco won’t make a return on. Secondly, and perhaps more grim, much of what was written off revolves around the last several years’ investments which would normally have been starting to deliver growth to the business. Of course, it is back to the basics for Tesco. But, most importantly Tesco is now in a race to get smaller as fast as possible so that it might think about growth again somewhere down the road.”

Daniel Latev, Euromoniter

The cost cutting and closure of underperforming stores will help alleviate profit margin pressure, while the reduced product range will allow for better product availably and easier shopping. Still, retail turnaround is a long process as consumers’ shopping habits take time to change, as exemplified by Carrefour.

The plan should also include a strategy of continued re-evaluation of its product range, including its private label offer, as well as its store footprint and multichannel offer. Price will be its main tool used to fight discounters and competition from the remaining big four in the UK grocery market, but the company will also need to leverage its product, locations and positioning to regain share.

Jeremy Marshall, Bentham Europe

Marshall is a litigation funder and is funding the group shareholder action against Tesco regarding their previous profits overstatement.

Dave Lewis speaks today of ‘getting transparency into the business case’. We have been saying for some time that investors have been kept in the dark for far too long which is why we announced that we would fund shareholder litigation. We hope that Tesco will engage in that litigation in a similar vein.”

Darren Shirley, Shorecap

"To say that Tesco had a nightmare year in FY2015 would be an understatement, an out-turn that would simply have been unfathomable in days gone by...

We need time to work on our medium-term financial models on Tesco and present adjustments as appropriate; note for FY2016 Shore Capital has been bottom of consensus for some time at 7.6p (consensus 10.7p, source: Vuma), and we fear pressure may remain on the downside.

What we will state though is that 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.

It is perhaps worth reminding ourselves of the degree of change year-on-year with John Allan installed as a new chairman and Dave Lewis as CEO; who hasn't put a foot wrong since he started in our view. Alan Stewart is‎ an experienced CFO who has market credibility in our view, whilst Matt Davies will shortly be a widely regarded welcome resource to the senior team (he joins on the 11th May), not to overlook Trevor Masters running all International operations, Benny Higgins on strategy as well as the Bank and Jason Tarry in commercial. We deem this new team to be a force to offer greater downside protection of Tesco's shares."

Rickin Thakrar, Banco Espirito Santo

"From the conference call: The company said three things of note: 1) it is cautious still on profitability due to Hungary and the need to invest more in the UK. This is surprising given the UK is at a zero margin. 2) Tesco believes it can trade its way out of junk bond status though working capital improvements. 3) It is not willing to sell Asia now due to its profitability and useful cash flow and all funding options are on the table.

We believe there might be some downgrades to outer year consensus numbers due to weak associate income, higher cash financials and cash tax. Also disappointing is the level of profitability in Europe and Asia which are sources of high margin for Tesco, particularly in Korea and Ireland. Tesco has said there it will not do a rights issue but ‘all funding options are on the table.’

We are surprised that Tesco would be cautious on zero profits in the UK and £1.4bn in EBIT as this supposedly was a kitchen sink. Our concern for Tesco is that it may further lose profitability in Asia losing its source of funding for the group, and it also might be difficult to get full value on its Asian assets.

We believe Tesco should have put forth a rights issue and avoiding it now to trade its way out is not particularly conservative in our view – especially given the large working capital outflow. We believe consensus will have to make some downward adjustments on net debt and EPS calculations given the high cash financials and tax as well the poor trade in Asia and Europe."

Marc Kimsey, Accendo Markets

"Yet another shocker from Tesco. This set of results disappoints on every level - the pretax 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". 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."

Mike Dennis, Cantor Fitzgerald

"There are several points worth considering post these results:

1) we believe Tesco should consider closing 200 underperforming supermarkets/superstores and focus on growing the more profitable remaining 700 stores (excluding Express), in addition, this should also allow for £40m of cost savings from the closure of a distribution centre

2) Tesco should not only reduce its slowest selling product range, but also reduce credit days to secure a much lower net cost of goods to invest and recapture its customer base and squeeze Sainsbury’s who we believe have been the main net beneficiary of Tesco’s poor trading

3) Matt Davies, Tesco’s UK CEO as of 1st June, should consider a further reduction in staff and a significant simplification of central functions and category management. Aldi UK today generates twice the sales per FTE compared to Tesco UK and is expected to report higher trading profits

4) In our research note, entitled “Box Cutter” dated 11th July 2014, we stated that Tesco needed to address the 2.67m sq ft of uneconomic superstore and hypermarket retail space. We believe this space could be used for profitable destination leisure facilities, concessions in various related home categories and other healthcare services.

5) Tesco needs to work with suppliers to reduce excess capacity in certain categories in the European supply chain to allow it to squeeze the discounters’ cost of goods. "

Crawford Spence, Warwick Business School

"These figures are absolutely huge - nearly the biggest loss in UK corporate history. However, they need to be understood in context. They relate mostly to asset write-downs rather than poor trading performance.

Underlying trading performance for Tesco has actually not been too bad in recent months. In many ways Tesco has decided to make these losses now rather than later. It all needs to be understood within CEO Dave Lewis's strategy of 'taking a bath' in his first couple of years in the job - basically, if he gets all the skeletons out of the closet early on then Tesco will look bad initially, but he will give himself a set of benchmarks that are relatively easy to surpass in the coming years."

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