Britain's Tesco counts cost of decline with record loss

By James Davey and Neil Maidment

LONDON (Reuters) - Tesco revealed the cost of its spectacular decline on Wednesday with an annual loss of 6.4 billion pounds ($9.5 billion), one of the biggest in British corporate history, and warned that there could be more pain to come.

The 96-year-old group, which dominated the British retail landscape for decades, wrote down the value of its business by 7 billion pounds, suffering in an industry price war sparked by the march of discount chains Aldi and Lidl.

It reported a near 60 percent drop in 2014/15 trading profit and said it may struggle to hit even that level this year as it set out the work needed to recover from fierce competition and the fallout from an accounting scandal.

"We sought to draw a line under the past and rebuild from here," said Dave Lewis, a former Unilever executive who has impressed investors with his decisive action since he took over from the sacked Tesco veteran Philip Clarke in September.

"There are some encouraging signs that what we're doing is the right thing but we're very much at the beginning of a journey."

After two decades of uninterrupted growth, Tesco lost its way when it became distracted by expensive overseas expansion and failed to spot the threat from discounters at home. It was wrong-footed too by the popularity of local stores, including more premium names, that took customers away from its huge out-of-town sites.

Lewis, dubbed "Drastic Dave" for his radical overhaul of Unilever businesses, has fought back with lower prices, more staff and better customer service, boosting recent trading.

Tesco shares, which have risen by a quarter this year, were down 1.1 percent at 1002 GMT. One institutional investor who declined to be named said the results were as ugly as feared.

"It's every bit as grisly as people might have thought and more," he said. "There's really not very much to be excited or positive about at all."

JUNK RATING

The full-year results showed the strains on the group's finances, with its credit rating already cut to junk.

Net debt ballooned to 8.5 billion pounds, while the net pension deficit jumped to 3.9 billion pounds from 2.6 billion pounds. The company has agreed to pay 270 million pounds per year into the scheme to help make up the shortfall.

It also wrote down the value of its property by 4.7 billion pounds and gave no indication of when scrapped dividend payments would resume.

Tesco's trading profit was 1.4 billion pounds, in line with company guidance but less than half of the 3.3 billion pounds made the year before and a third straight year of decline.

Lewis, spearheading a new management team, told reporters he could not guarantee it would hit that level this year due to the investment required to get back on track.

Tesco's property writedown follows similar moves by rivals Sainsbury's and Morrisons and reflects the deterioration in British supermarket conditions in recent years. It is on top of about 4 billion pounds of charges Tesco has taken over the last three years.

Lewis has set out plans to sell some assets to reduce debt although he has repeatedly said that Tesco's funding levels are secure and there is no need for any fire sale.

Tesco said it was moving closer to a deal regarding its data-gathering arm Dunnhumby and had a clear idea about the future of the rest of its portfolio. According to a source, Tesco is aiming to sell a majority stake in Dunnhumby, valued by analysts at 1-2 billion pounds.

The results did also show some signs of improvement, with like-for-like sales in its home market, excluding fuel and VAT sales tax, down 1.2 percent in the fourth quarter, from a fall of 4.4 percent in the previous three months.

Like-for-like volumes were up for the first time in over four years.

"To say that Tesco had a nightmare year...would be an under-statement," said Shore Capital analyst Clive Black.

"Whilst the challenges are considerable and that there is no quick fix ...we are pleased with the management team that has been put into place, which gives us some confidence of improvement and better times ahead."

($1 = 0.6696 pounds)

(Writing by Kate Holton; editing by Guy Faulconbridge and Keith Weir)