Chief executives recruited to halt a corporate crisis start with two advantages.
They can gather all the accumulated dross and dump it on shareholders in one steaming heap. Then, having demonstrated the size of the job ahead, they can be vague about when life will improve for investors as opposed to customers.
Dave Lewis made full use of both prerogatives on Wednesday. Tesco’s thumping loss of £6.4bn was suitably horrendous. In large part, it was a function of £7bn of one-off charges, everything from £4.7bn of lower property valuations in the UK to a £630m recognition that Chinese business is rotten. Fair enough. Past management, over a decade and a half, plainly overinvested and splurged capital wastefully.
Vagueness about the future, on the other hand, will only be tolerated for so long. At a pure trading level, Tesco was slightly loss-making in the UK in the second half of the year. Investors understand the reasons: there was a crisis and Tesco had to cut prices in a hurry and add staff in its stores. But what shareholders want to know now is how long the state of emergency will last.
Over the full year, the profit margin in the UK was 1.1%, a far cry from the impossible 5.2% that Lewis’s predecessor, Philip Clarke, ridiculously attempted to defend. When should a leaner Tesco, with a smaller head office and Lewis’s new collaborative approach with suppliers, plan to return to the top of the supermarket league on margins?
Lewis would be silly to set a firm date at this stage. But surely, on a group-wide basis, he could commit to beating last year’s trading profit of £1.4bn in the coming year. He didn’t. It is merely an “aspiration”, he said. In other words, in trading terms, Tesco may not have hit the bottom yet.
Full marks for caution, but the other rule for new chief executives is that honeymoon periods last about 18 months, tops. In a year’s time, Lewis must show that the “early encouraging signs from what we have done so far” will produce a discernible improvement in profits.
If not, the worries about the stretched balance sheet will intensify. Net debt, even ignoring lease commitments and the deficit in the pension fund, was £8.5bn at the year-end. That’s one hell of a sum to carry if trading profits can’t be relied upon to rebound quickly. No dividend, a halving of capital expenditure and proceeds from disposals will help the debt position. But the numbers require the disposals to happen – and at decent prices.
To be fair, Lewis has more than matched expectations in eight months at the helm. Tesco is no longer being beaten up by smaller rivals and Clarke’s strange diversions into video-streaming have been abandoned. But shareholders still care about hard returns, and when they will arrive. They won’t buy the Vague Dave act for ever.
This article was written by Nils Pratley, for theguardian.com on Wednesday 22nd April 2015 16.06 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010