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Tesco blackhole may be larger than feared
JP Morgan analysts question Tesco blackhole as well as rent bill and depreciation charges as pressure on retailer continues
The blackhole in Tesco’s accounts may be larger than feared, analysts at JP Morgan Cazenove have claimed.
The profit generated by Tesco’s UK subsidiaries in the last financial year was £319m less than the profits reported by the company itself in the UK, according to an analysis of accounts at Companies House by JP Morgan.
Tesco has already admitted that profits were overstated by £145m in the year to end of February 2014 and previous years, but this still leaves a gap of £174m.
A study of Tesco’s accounts at Companies House shows that the average gap over the seven previous years between the subsidiaries and the company’s stated profits was £28m, including just £3m in the previous year.
Jaime Vazquez, analyst at JP Morgan, said: “We are unable to explain the full gap between the Companies House earnings before interest and tax and the reported UK trading profit of 2013/14. Regardless of what the exact UK profit was in 2013/14, it seems clear to us that Tesco’s results are being hit by the unwinding of supplier rebates as volumes fall, hence the need to reset the framework with suppliers.
“We remain cautious on Tesco and the rest of the UK sector. The sector needs to go through a period of adjustment following the profit and expansion excesses of the past decade. The pain will come in the form of a price reset – of which neither Tesco nor Sainsbury have addressed yet – balance sheet recapitalisations and store closures, in our view.”
Tesco is reeling from the most difficult year in its history after issuing four profit warnings as it deals with the fallout from an accounting scandal and a decline in sales.
In a statement, Tesco said: "As the analyst acknowledges the analysis attempts to reconcile accounts for a number of subsidiaries with the group accounts which in some cases are prepared on different accounting bases, have been updated to reflect our commercial income adjustments, and which do not reflect the impact of, for example, intercompany balances."
However, Tesco was unable to explain why the gap between the two number was so much larger in the 2013/2014 financial year compared to previous years.
Mr Vazquez also expressed concern at the annual bill Tesco must pay to rent its stores, which have increased from £900m to an estimated £989m, and its policy for accounting for depreciation. He said that Tesco’s accounts suggest the company has extended the implied life of its non-property assets, meaning it could eventually have to book impairment charges.
Mr Vazquez said Tesco’s latest accounts show an implied life of 14.6 years for its non-property fixed assets, up from 8.4 years in 2006/2007. He added: “This may be explained by the fact that the company is truly using its shelves, vehicles and fridges beyond their accounting lives or that the company is extending the assumed asset lives used in its depreciation calculation.”