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Is The Bad News Really All Out For Tesco PLC?

Releasing unexpected bad news along with the expected is a common political trick, with our elected representatives hoping we might not quite notice it as much. But do companies do it too?

That’s what some have been asking of Tesco (LSE: TSCO)(NASDAQOTH: TSCDY.US), after results released on 22 April contained some painful reading. Bad news had been expected, but what was revealed sent the share price down 12p (5%) on the day to 222.7p, and it’s since slipped to 219p.

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Massive loss

The big bad number was that £6.4bn statutory pre-tax loss — the sixth biggest in British corporate history — leading to a loss per share of 70.2p. In the UK, group trading profit was given as £467m for a massive 79% fall. And if the full impact of that is not immediately apparent, it pushes the UK down into second place with Asia bringing in £565m (and a much more modest fall of 18%). Had Tesco not made those Eastern forays, the 2014 profit figures would be in an even worse shape.

What did make a few eyes smart a little was Tesco’s write-down of £7bn in one-off charges, with £4.7bn relating to the company’s fixed assets, including £3.8bn wiped off the expected value of its current stores.

Some companies can be seriously tardy when re-evaluating the value of things like stores and factories, and as such I think it’s refreshing to see Tesco being so open so quickly — it’s the kind of approach I did expect when Dave Lewis took the helm.

A clean start

But is the bad news all out yet, or is Tesco holding any back to drip out in the future? I think the answer to both those questions is actually no. I see no sign that the firm is being economical with its pronouncements. In fact, this looks like an attempt by a new broom to sweep out all the cobwebs and expose the current reality as best it can, so we all know where we’re actually starting from.

Yet I do see glaring signs that the UK’s supermarket business is in for even harder times than we’ve come to expect, and I fear those who think we’re at the bottom for Tesco are mistaken.

The latest consensus forecasts suggest that the combined pre-tax profit for Tesco, J Sainsbury and WM Morrison is likely to come to only around £2bn for the 2015-2016 year, with some predicting less — The Mail on Sunday has forecast a total profit of less than £1bn for the three.

To put that into perspective, Tesco alone enjoyed more than £4bn in pre-tax profit as recently as 2012.

Recovery? Don’t hold your breath

The City’s pundits are already suggesting earnings recoveries of 20-30% for Tesco and Morrison in 2017, though they’re less bullish about Sainsbury. But I see that as way too optimistic at this stage, as the full effect of the price wars won’t have been felt at the bottom line yet — and the price wars still have some way to go before the big supermarkets catch up with Lidl and Aldi.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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