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With profits paper-thin, Tesco's new boss has little room for manoeuvre

Tesco saw £7bn in 'one-off' costs contribute to the overall losses. Credit: Andrew Milligan/PA Wire

Tesco has just announced the biggest loss in its 96 year history and one of the worst in British corporate history.

A trading profit of £1.4 billion turns into a pre-tax loss of £6.4 billion, principally due to series of enormous accounting writedowns.

The company has decided that its estate of 2,500 stores is worth £3.8 billion less than it previously thought. The 49 development sites that it now plans to dispose of, it will do so at a loss of £925 million.

£1.4bn
Tesco pre-tax profits in year to 28 February
£6.38bn
Pre-tax losses over the same period after £7bn in one-off costs

Tesco's joint-venture in China has been written down in value (by £630m) - so too has its "Dobbies" garden centre business (by £116m).

Even the warehouse stock has been revalued - it will still be sold but for around £570m less than the supermarket had been banking on.

Tesco now believes that past profits were exaggerated by £208 million - that "loss" has been booked.

And then there are the costs of all those redundancies - as Tesco relocates its UK headquarters, closes 43 UK stores and reorganises its continental Europe operations. Total cost £416m.

These are, of course, one-offs. The Tesco chief executive, Dave Lewis, is keen to emphasise the brightness of the future.

Tesco boss Dave Lewis took over in August. Credit: Reuters

"We are putting customers back at the centre of everything we do" says Lewis and he believes he's getting results. Footfall is up, transactions are up, sales volumes are up. More people are buying more things.

True enough. But this business still looks challenged, to put it mildly. Debt has jumped to £8.5 billion, the company's debt rating sits in the gutter. Tesco's pension scheme is in deficit to the tune £3.8 billion.

In a startlingly short space of time Tesco has gone from mega-profit machine to loss making. Four years ago the supermarket made £3.5 billion - precious little of that was exaggerated

In the second half of this year the UK business lost £32m on a trading basis. Worse still, Lewis looks boxed in. Tesco's profit margin has slumped from 5% last year to 1.07%.

Put another way, one penny in every £1 that comes through the tills is profit. That's paper thin and doesn't leave much room for manoeuvre.

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