LONDON -- Tesco left crucial questions unanswered after reporting the biggest loss in its 96-year history.
The struggling supermarket gave little indication of how it will tackle $32.6 billion of debt, leaving open the future of businesses such as the Dunnhumby data-analytics unit, one of a number of disposal candidates. A rights offering remains a possibility, even though Chief Executive Officer Dave Lewis sees that as a last resort.
Reducing Tesco PLC's debt will be crucial to the CEO's price-cutting plans as he fights to retain customers in the face of an onslaught from discount competitors Aldi and Lidl. The company also faces competition from Asda, Bentonville-based Wal-Mart Stores Inc.'s arm in the United Kingdom.
Tesco "needs to de-leverage, materially so," Darren Shirley, an analyst at Shore Capital, said in a note. "However, how it does so and at what pace is not yet set out."
While last week's results showed signs of improved British sales and brought a potential solution to the company's widening pension deficit, relieving the strains on Tesco's balance sheet remains key to Lewis' recovery efforts. More than seven months into the job he started last year, the CEO has yet to make inroads into the debt load, although he said Tesco's liquidity and debt profile give him time to maneuver.
"The absence of disposals is disappointing," Niamh McSherry, an analyst at Deutsche Bank, said in a note. "But we still expect Dunnhumby to be sold in 2015 and see upside potential from further portfolio restructuring."
Tesco said in January that a sale was among options for Dunnhumby, which analysts have valued at $3 billion. While Lewis said the divestment process is progressing , that is "not close to the total solution to Tesco's de-leveraging needs," said Shore Capital's Shirley. "This leads us to return to the subjects of the position of other businesses and/or an equity capital raise."
Lewis wouldn't rule out a possible rights offering, saying that his initial priorities were to "realize as much value from the business we have, before considering the opportunity that might exist in raising fresh equity."
Other options the CEO may consider include the sale of the company's banking and Asian assets, analysts at Sanford C. Bernstein have said. Those operations have been valued at more than $15 billion combined.
While the future shape of the group is unclear, Lewis has made progress in reducing a $5.9 billion pension deficit. Tesco has agreed with the trustees to pay $406.4 million per year into its main British program, and consultation has started with members to close the defined-benefit plan to new entrants.
The funding contribution "is not significantly more onerous than our forecast," McSherry said.
Lewis also showed that measures to get customers back into Tesco stores are taking effect. Sales declines eased in the fourth quarter as measures such as price cuts led to the first rise in transaction numbers since 2012.
Discounts announced in January were equivalent to a net price reduction of 25 percent and led to a 28 percent increase in volume over the next four weeks, Lewis said.
Focusing on fewer stores is another area he should consider, said Mike Dennis, an analyst at Cantor Fitzgerald, who recommends that Tesco close 200 underperforming superstores in addition to the 43 stores it has already shut.
Dennis also recommends further staff reductions, saying any recovery in British profitability "looks three years away."
SundayMonday Business on 04/26/2015