Monday, 18 May 2015

That Tesco 'property' write-down

SG emailed in: "To what is [Tesco's massive reported loss] attributable (since land values are generally on the rise)? Is it mere accounting finesse?"

Yes, partly, new management likes to 'clear the decks' by having massive write-downs, which it can blame on the outgoing management; they then gently reverse these to flatter future profits etc etc.

As is widely known, see e.g. Robert Peston goes shopping...

Now [Tesco] could offer even lower prices because it was operating on a bigger scale, enabling it to buy in bulk and sell cheap. This was due to another canny move by Tesco. It bought vast amounts of [cheap] property during the recession of the early 90s, acquiring sites for a new generation of out-of-town superstores.

Clearly, making windfall gains on land prices can delude businesses into thinking that their actual business model is better than the competition's. It isn't, it's a one-off thing which does not serve as a guide to future performance. But they only discover this once land prices have gone up again and expansion becomes very expensive or they have to pay rent for their new stores.

So how much of the write-down actually related to their freehold land and buildings..?

From page 4 of Tesco's preliminary results to 28 February 2015:

One-off items
Plant, property and equipment impairment and onerous lease charges - £4,727m
Goodwill and other impairments - £878m
Stock - £570m
Restructuring - £416m
Reversal of commercial income recognised in prior years - £208m
Other - £223m
Total one-off items - £7,022m

Note 12 on page 30 onwards shed a bit more light on things; it appears that most of the £4,727m 'property' write-down relates to new stores they planned to open, not their existing freeholds, so it is sub-divided into onerous lease contracts (where Tesco overbid on the rent); assets under construction (mothballed new stores); etc etc.

Suffice to say, the net book value of their land and buildings has 'only' fallen from £20.7bn to £17.8 bn. Because of accounting practice, they cannot do an equal and opposite write-up of the land and buildings which are now worth more than cost (clue: there is no revaluation reserve on the balance sheet); the chances are that the market value of all their freehold stores is rather more than £17.8 bn.

Glad to have cleared that up!


Robin Smith said...

Goodwill and other impairments - £878m

This is an economic rent too

Mark Wadsworth said...

RS, yes, indeed it is. "Goodwill" can only arise from a monopoly position (earned or unearned - and there are shades of grey on this).