Tesco Reports Record Loss as Spiraling Debt Adds to Strain

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Tesco’s Turnaround Strategy Amid Record Loss

Tesco Plc reported the biggest annual loss in its 96-year history after writing down property values and taking steps to reduce its pension-fund deficit as it seeks to ease increasing financial strains.

The net loss was 5.74 billion pounds ($8.6 billion) in the 53 weeks ended Feb. 28, Britain’s largest supermarket company said in a statement Wednesday, seeking to put behind it a year that’s included an accounting scandal, management upheaval and slumping sales both at home and internationally.

Chief Executive Officer Dave Lewis is seeking to tackle 8.5 billion pounds of net debt and a 3.9 billion-pound pension deficit. Lewis, aiming to rebuild trust with customers and investors after an overstated profit forecast, said sales declines eased in the fourth quarter as measures such as price cuts led to the first rise in transaction numbers since 2012.

“There are probably more negatives than positives,” said Bryan Roberts, an analyst at Kantar Retail in London. “The overall loss is a lot worse than anyone had envisaged. On the plus side, U.K. trading momentum is positive.”

Tesco shares were little changed at 235.10 pence at 8:09 a.m. in London trading. They’ve risen 25 percent this year on optimism that Lewis will be able to revive the business.

The scale of the loss was driven by a 4.7 billion-pound writedown on the value of Tesco’s stores, the grocer said, following in the footsteps of its main competitors. The growth of online shopping, convenience stores and budget outlets have all contributed to the slumping values for superstores.

Total one-time charges against profit amounted to 7 billion pounds, and were mainly non-cash, Tesco said.

More Debt

Net debt increased by 1.9 billion pounds in the year and the retailer’s pension deficit widened by 1.3 billion pounds, increasing the strain on its finances at a time when Lewis is ploughing money into price cuts to help withstand competition from discounters Aldi and Lidl.

“All funding options are still on the table,” Lewis said on a conference call. The CEO said he wants to “realize as much from the business as we can” before he considers a rights offering of new shares to strengthen the balance sheet.

Tesco confirmed that it won’t pay a final dividend as it seeks to preserve cash, and said a review of options for the Dunnhumby data-analytics unit is “well advanced.” The company said in January that a sale was among options for the business, which analysts have valued at about 2 billion pounds.

Pension Deficit

To cut the pension deficit, Tesco has agreed with the trustees to pay 270 million pounds a year into its main U.K. program, the company said. Consultation has started with members to close the defined-benefit plan to new entrants.

“It sounds like they have got their heads round the pension deficit,” Kantar’s Roberts said. “They do have facilities in place to deal with the debt.”

Tesco said efforts to win back customers are starting to take hold. Same-store sales in the U.K. fell 1.7 percent, excluding fuel and value-added tax, compared with declines of more than 5 percent in each of the previous two quarters.

“By focusing on the fundamentals of availability, service and targeted price reductions, we have seen a steady increase in footfall, transactions and, most significantly, volumes,” Lewis said in the statement. “More customers are buying more things at Tesco.”

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