New Tesco boss Dave Lewis has hinted at a rationalisation of the retailer’s property portfolio to help get the business back on its feet following the discovery of a £263m overstatement of profits.
The group is undertaking a wide-ranging review of the business after seeing statutory profit slide by 91% to £112m and pretax profit drop by almost 47% to £783m in the six months ended 23 August.
Lewis, who joined the world’s second-largest retailer less than two months ago, said he had three immediate priorities for the group going forward – to recover Tesco’s competitiveness in the UK, protect and strengthen its balance sheet and rebuild trust.
The new chief executive said that property would be a “key and important consideration” in the group’s work to strengthen its balance sheet.
He said that while there had been a very deliberate decision to progress a sale-and-leaseback programme over recent years, the freehold estate was now at 53% and its annual rent bill was up to £1.4bn, which Lewis said was a significant percentage of the supermarket chain’s cashflow. Turnover for the period under review dipped marginally to £34bn.
Recently installed chief financial officer Alan Stewart also singled out the group’s £9.4bn of lease commitments in his concerns over the highly leveraged state of the business and said that the specific impact of the sale-and-leasebacks undertaken by Tesco needed to be investigated. “We need to find out what we are committed to,” said Stewart.
Several of the sale-and-leaseback dals undertaken by Tesco during its boom inclued a buy-back option at 10 years.
]Lewis said that releasing value from its portfolio would form part of the strategic review, with all options kept open. He said that Tesco had 32 different head offices, which offered “an opportunity to release value”.
“We think there are significant opportunities to extract value from the business we have,” said Lewis. “We will go there first before we look at other opportunities.”
Lewis ruled out a rights issue in the immediate future.
Discounters will not win out, insists Tesco
Tesco chief executive Dave Lewis has refused to admit that it is inevitable that the big four supermarkets will continue to lose market share to discounters Aldi and Lidl.
Lewis said: “We have to adapt our business. I don’t take anything as inevitable.
We have to compete.”
He added that while two-thirds of Tesco’s hypermarket portfolio was performing, transforming the sites into attractive destinations would form part of the strategic review of the business.
The statement came despite the retailer saying it would cut capital expenditure by £1bn to £2.1bn. The big four – Tesco, Asda, Sainsbury’s and Morrisons – have been
rapidly losing market share to the discounters, with ratings agency Moody’s predicting that Aldi’s and Lidl’s combined share could reach 10% in the next couple of years, up from 8.3%.
