Tesco Plc H1 Results Explained: What They Mean For You…

The English language translation of Tesco Plc’s (LON: TSCO) first half results.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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…

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Down 38% in weeks! Time to snap up NIO stock?

NIO stock's more than doubled in value over the past five years but has been on a wild ride lately.…

Read more »