With today marking the release of another set of half-year results for Tesco (LSE: TSCO), I take this morning to look once again at the hard numbers and what these will be likely to mean for the shares during the months ahead.
Remember remember, what happened just before last November…
The first and foremost point for investors to remember when delving into Tesco’s half-year results is that last time around, a £544 million charge for improper accounting saw the group’s statutory financial results driven into the ground, which has its own implications for this year’s numbers.
For an adequate assessment or comparison of the business between the two time periods, it is best to strip out this figure, as it currently allows management to suggest that there has been some notable form of progress during the period when, in fact, it seems that there has been very little.
Sales figures are poor, whichever way you look at them
In the first half, total group sales are down once again, this time by 1.9% — with the reduction in the UK business coming in at 1.2%.
Despite a small decline in the raw cost of goods sold (cost of sales), top line profits (excluding exceptional items) fell by 21% when compared with the first half of 2014.
Operating profits were significantly higher than last year’s statutory result; however, if we strip out the impact of the improper accounting charge, they were actually 54% lower this time around.
While management often talk a great deal about like-for-like sales and average volume sales having risen by one or two percent, these figures barely warrant any comment if said volumes are changing hands at record low prices.
They will never be sufficient enough to make up for the margin that the group has lost through its price leadership ambitions.
Earnings are non-existent again
Tesco’s underlying business recorded a loss from operations of £368 million for the half year, while remeasurements of defined benefit pension liabilities and foreign exchange losses cost the group a further £712 million.
These figures push Tesco to a comprehensive half-year loss of £1,080 million and a further 12.9% fall in the value of shareholders equity, which now sits at just £6.15 billion.
Even after the group made £3.6 billion (net of debt) on its sale of the South Korea unit, discontinuing operations are still costing Tesco considerable sums, while the performance of its continuing operations remains frightfully poor and dividends non-existent.
Little progress on balance sheet
One of the more amusing statements contained within the update is CEO Dave Lewis’s assertion that significant progress has been made in terms of reforming the balance sheet. I do not see any progress worthy of mention.
Total debt has fallen by 9% since August 2014, which may be positive, but the nominal reduction amounts to just over £1.2 billion. This is disappointing when considering that the group has raised over £3.6 billion net from the sale of its business in South Korea.
This has left total debt sitting at £12.6 billion, with debt/equity now up to 2x and gearing at 64%.
Furthermore, the failure of efforts to offload Dunhumby has now lead Drastic Dave to announce that the asset disposal process is complete and that further reductions to the balance sheet will be made using increased cash flow from operations.
I don’t know just how this balance sheet strategy is supposed to work because, as far as I can see, the value of free cash flow that Tesco is able to generate from operations is still falling, with the recent reduction between the two half years coming in at 51%!
Drastic Dave is not drastic enough
My conclusion on Tesco is that Drastic Dave is clearly not drastic enough. After coming into the business last year amidst lots of talk about a big turnaround, new management have done nothing more than continue with the strategy of the old.
There were a few whimpers about asset sales, a quick deal over in Asia and then back home to Blighty with little to show for it.
Now shareholders remain at the mercy of this whole price competition strategy. A strategy that, so far, has decimated margins, led to significant depreciation in the value of shareholder’s equity and helped drive the group into a full year’s worth of losses — with little sign of this abating.
Where will this all end? Who knows. I suspect that a rights issue of some sort may not be that far off, particularly if management are unable to organise further disposals and the cash flow situation continues to deteriorate.
For now, Tesco shares appear to be holding their ground at 190p in early trade, heaven only knows why…
