Tesco (LSE: TSCO) made headlines this morning with a £7bn write-off — but the real story lay elsewhere, in my view: after a long decline, Tesco’s sales volumes have started to rise.
Shareholders will need to be patient, however, as the group confirmed that there will be no final dividend for last year.
A £7bn problem
Most of Tesco’s £7bn impairment charge is the result of a non-cash impairment of £4.7bn on the firm’s property portfolio.
Of this, £3.8bn relates to the value of current stores, which the firm now believes are worth less than they used to be, due to “challenging industry conditions and the decline in profit over the last year”. The remaining £925m is due to write-downs on sites where it is no longer planning to build new stores.
And the good news is?
Tesco chief executive Dave Lewis was keen to emphasise that the underlying picture is more positive — and I’m tempted to agree.
The group’s sales volumes rose by 1.5% during the final quarter of the firm’s financial year, even though food price deflation mean that like-for-like sales revenues fell by just 1.0%. This suggests Tesco is stemming the decline in its market share.
Underlying earnings per share for 2014/15 were 9.42p, broadly in line with forecasts. However, this does leave the group on a hefty trailing P/E of 25 — a risk that’s highlighted by Tesco’s UK trading profit margin, which fell to just 1.07% last year.
Market reaction?
Tesco’s share price was largely flat when markets opened this morning: most of today’s news was already known, and investors are now waiting to find out how Tesco will deal with its remaining problems — and whether the recovery in sales volumes can be maintained.
The firm certainly still has problems: net debt rose by nearly £2bn to £8.5bn last year, while the firm’s total indebtedness — including lease commitments and a £3.9bn pension deficit — is now £21.7bn, up from £18.6bn last year.
In a conference call this morning, Mr Lewis said that the group would look to raise cash from asset sales before deciding whether to raise new money from shareholders, but did not rule out a rights issue.
Buy, sell or hold?
Despite these challenges, there are signs of progress at Tesco.
A turnaround was always going to take a few years, given the size of the business, and in my view Tesco remains a long-term hold.