New Tesco (LONDON:TSCO) CEO Dave Lewis certainly appears to be living up to his nickname “Drastic Dave” this morning as he took a meat cleaver to Tesco’s balance sheet, by announcing £7bn worth of one off charges in relation to property impairments and goodwill.
On a trading basis profits came in at £1.4bn with the most recent quarter seeing the supermarkets first improvement in like for like sales in over four years, which would appear to suggest that some of the recent changes that were announced at the end of last year are starting to bear fruit.
Today’s record losses of £5.7bn may well have been more than markets expected but in a way they are also encouraging, as they signal a determination by management to clean the slate and get on with turning the business around, and drawing a line under a pretty awful last couple of years.
The market certainly seems to think so, given that Tesco remains the UK’s biggest supermarket in terms of size, floor space and purchasing power, and while the young pretenders of Aldi and Lidl are undoubtedly eating its lunch, they look like they starting to run up against the limits of their capacity.
Risks undoubtedly remain with no details about what Tesco intends to do with those written down assets, but given the well documented UK housing shortage I would imagine that Tesco probably won’t have any problems getting rid of the real estate over the next few quarters, if they feel the need to do so. The company also announced increased contributions to plug the hole in its pension deficit of £270m a year, but they aren’t the only FTSE100 company with that particular problem.
One thing is certain, despite the recovery in the share price the supermarket sector is likely to continue to face squeezed margins over the course of the next 12 months given the continued visibility of Aldi and Lidl, as they not only ramp up their TV advertising campaigns, but also as new shops continue to pop up on the UK High Street.
Despite this squeeze Tesco looks to be gearing up for this challenge and still has a head start when it comes to geographical footprint and size. If trading conditions deteriorate the company still has the flexibility to cut further, and with no mention of a “rights issue” the focus will shift towards more details of how the company intends to shore up its balance sheet in the months ahead.
The new boys of Aldi are expected to open another 60 news stores this year alone, while Lidl last year expanded their store network to over 600 stores in the UK, which simply reinforces the narrative that more shops equals more competition, and thus slimmer margins.
The latest retail data from the British Retail Consortium (BRC) in the lead-up to Easter bears this out, with strong growth in terms of total food sales for March, but this growth is likely to have been fuelled by the sharp drop in food prices over the course of the last few months, which could well translate into reduced profits.
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