Tescos (LSE: TSCO) reported pre-tax loss of 6.4bn is one of the largest corporate losses ever reported by a UK company. However, while the loss appears daunting at first glance, theres more to it than meets the eye.
Indeed, some City analysts now believe that Tescos accountants inflated the companys loss, to get as much bad news as possible out of the way now, and flatter figures going forward.
Accounting standards
Tescos 6.4bn pre-tax loss included7bn of writedowns and charges, 4.7bn of which was for stores that are still trading.Of this, about 2.3bn was for supermarkets trading in the UK.
According to City analysts, Tesco calculates the value of each store it owns by computing the value of future cash flows from the asset. In boom times, when customers are flocking to Tesco stores, the cash flow from each store will improve, increasing the value of the asset.
However, when sales and profits are falling, the projectedvalue of future cash flows from each store will also fall. This is why Tescos has been forced to revalue its property portfolio.
Still, some City analysts have questioned why Tescos numbers have changed so drastically over such a short period. And its believed that Tescos full-year 2014 results have been used tokitchen sink orsweep away past problems.
On the plus side, these property writedowns will save Tesco around 100m per year indepreciation costs, flattering profits.
Tescos decision to get this bad news out of the way now, before the groups recovery really starts, could be a great decision. Management can now focus on cutting costs, rebuilding a relationship with customers and stabilising the groups balance sheet.
Green shoots of growth
Tescos sales figures are already starting to show signs of life. According to data from research company Kantar Worldpanel, Tescos sales rose 0.3% in the 12 weeks to 29 March, following growth of 1.1% in the 12 weeks to 1 March. This was Tescos strongest sales performance in 18 months, indicating that customers could be starting to return to the retailer.
Foolish summary
Tescos pre-tax 2014 loss of 6.4bn may have been the companys worst loss in its 100-year history, but it marks a turning point for the retailer.
With the majority of the bad news out of the way, Tescos new management can focus on turning the business around, and there are already some signs of growth.
Unfortunately, Tesco’s dividend remains suspended for the time being — a disappointment for income investors.
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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.