Tesco’s (LSE: TSCO) reported pre-tax loss of £6.4bn is one of the largest corporate losses ever reported by a UK company. However, while the loss appears daunting at first glance, there’s more to it than meets the eye.
Indeed, some City analysts now believe that Tesco’s accountants inflated the company’s loss, to get as much bad news as possible out of the way now, and flatter figures going forward.
Accounting standards
Tesco’s £6.4bn pre-tax loss included £7bn of writedowns and charges, £4.7bn of which was for stores that are still trading. Of this, about £2.3bn was for supermarkets trading in the UK.
According to City analysts, Tesco calculates the value of each store it owns by computing the value of future cash flows from the asset. In boom times, when customers are flocking to Tesco stores, the cash flow from each store will improve, increasing the value of the asset.
However, when sales and profits are falling, the projected value of future cash flows from each store will also fall. This is why Tesco’s has been forced to revalue its property portfolio.
Still, some City analysts have questioned why Tesco’s numbers have changed so drastically over such a short period. And it’s believed that Tesco’s full-year 2014 results have been used to “kitchen sink” or sweep away past problems.
On the plus side, these property writedowns will save Tesco around £100m per year in depreciation costs, flattering profits.
Tesco’s decision to get this bad news out of the way now, before the group’s recovery really starts, could be a great decision. Management can now focus on cutting costs, rebuilding a relationship with customers and stabilising the group’s balance sheet.
Green shoots of growth
Tesco’s sales figures are already starting to show signs of life. According to data from research company Kantar Worldpanel, Tesco’s sales rose 0.3% in the 12 weeks to 29 March, following growth of 1.1% in the 12 weeks to 1 March. This was Tesco’s strongest sales performance in 18 months, indicating that customers could be starting to return to the retailer.
Foolish summary
Tesco’s pre-tax 2014 loss of £6.4bn may have been the company’s worst loss in its 100-year history, but it marks a turning point for the retailer.
With the majority of the bad news out of the way, Tesco’s new management can focus on turning the business around, and there are already some signs of growth.