Tesco shares could leap after last goodbye to disastrous 2014

Tesco will tomorrow close the book on a year that’s been little short of a disaster.

Understandably, the run up to the final 2014 results from the UK’s largest supermarket chain has brought several colourful reports about their likely severity.

And there is a certainly still a lot of scope for a final massive ‘washout’, even after four profit warnings (including the profit ‘misstatement’) a strategic review, suspension of the dividend and announced disposals.

Still anaemic

Despite significant measures Tesco announced over the last few quarters to reverse sliding sales due to pressure from discounters, a massive miscalculation of profit potential from aggressive store space expansion, and plenty of bad relations with its suppliers, it has achieved more of a slight swerve, rather than a turnaround.

To be fair, recent figures strongly suggest Tesco’s retail sales have finally bottomed.

Retail researcher Kantar Worldpanel said Tesco sales in the 12 weeks ending 29th March edged 0.3% higher compared to an assessment by Kantar during the same period in the year before.

On top of another 0.3% uptick Kantar noted in the 12 weeks ending 1st February, it’s possible to see Tesco (and Sainsbury’s, whose sales also stopped shrinking) as over the worst.

But as ‘recoveries’ go, Tesco’s sales rebound and those of its big UK rivals are anaemic to say the least.

A more robust comeback by Tesco would require it to implement all measures loudly mooted by the market for months, and perhaps a few more.

The Dave Lewis era begins

The important thing to remember is that CEO Dave Lewis, who’s been in the job a little over six months, is probably still highly motivated to kick out the last vestiges of kitchen sink.

Doing so would help ensure optimum chances of success for a grand (and strikingly modern) strategy that has in all probability been mapped out by the CEO and his new core team.

Consequently, Tesco’s final 2014/15 results on Wednesday 22nd April are likely to be crammed with many of the toxic impediments the market wants to see the back of, and then some.

In all probability, the results will be badly dented by the most painful set of write downs Tesco has booked in a decade.

An analysis of Tesco’s most recently published balance sheet (as at 23rd August 2014) suggested as much as £7.1bn of value was at risk of being struck out.

Tesco’s bonfire of its vanities will probably consist of:

• A write-off from its infamously sprawling property portfolio— to the total tune of £4.2bn, including more than 40 stores already earmarked for closure
• As much as £2bn in liquidated goodwill from about 50 abandoned investment projects
• c. £150m impact from the profit misstatement
• £300m for drastically slashed headcount

There was also some profit

I also see a moderate possibility that some £311m in negative retained earnings could be let go.

The inclusion of already booked “provisions/liabilities” could add £177m.

Some positive “exceptional” items could also throw a chink of light on the bottom line.

It looks like the effect of deferred and current tax liabilities worth up about £800m, could be eligible as offset for expected losses.

Finally don’t forget, analysts still expect Tesco to have made a trading profit during its fiscal year.

According to a consensus of analysts’ forecasts compiled by Thomson Reuters, full-year profit could be £760.86m.

Tesco itself has warned that trading profit for the year would be no more than £1.4bn

An embarrassing drop from the £3.3bn made the year before and third-consecutive annual profit decline.

That would bring Tesco’s final annual loss close to the £5bn quoted in media reports.

Spring sales

To keep shareholder malaise to a minimum, after all that, it would make sense for Tesco to attempt to deliver on widely demanded disposals—it should at least provide an update on the subject tomorrow.

Reuters reported last week that Tesco aims to sell a majority stake in its customer data firm Dunnhumby.

Its Dobbies Garden Centres chain, Giraffe restaurants and stake in the Harris+Hoole coffee shop business could also be sold.

The most significant contribution from potential disposals could be realised from selling stores or even entire businesses in international markets.

Cash call risk

On top of all this, there are lingering fears Tesco could seize an opportunity from having so much negative news in one day.

A rights issue has not been ruled out.

But we suspect Tesco would probably have already signalled intent by now, if it had such plans.

Either way, Tesco’s share price comeback of 62% from December lows until early April was sufficient reason for some investors to reduce as the finals loomed.

Momentum in the daily timeframe (see the Slow Stochastic sub-chart in purple and pink lines) suggests this sell-off may be close to completion.

Early in Wednesday’s session, shorter-term traders of City Index’s Tesco Daily Funded Trade will need to decide if the current up-wave has strong enough legs to run higher.

The attached stochastic-based trading system emitted a signal to exit long trades early on Tuesday afternoon, but the crossover protocol could soon be met since both moving average (MA) lines point upward and the longer MA has crossed the shorter-term one.