Tesco (LON: TSCO) (OTCPK: TSCDY) shares are up 2% on the back of a reported 50% or so fall in profits. This isn't quite what we might expect in reaction to such annual results. However, never forget that share prices always include what we already know - therefore what moves share prices is new information. We all knew that inflation and the highly competitive UK supermarket sector would lead to not very good results. So, today's announcement is only a slight change on what we thought we knew and thus the slight change in the share price.
As the usual reports have it, an incredibly tough year for Tesco, profits halved on property write downs, they're fighting back by reducing the price of milk and so on. Oh well, the usual newspaper reports will give us the headline numbers, as usual.
What's rather more important are the two issues buried in those accounts. One is obvious, Tesco themselves point to it. The other is not obvious but is still important. The obvious issue is that the British commercial property market is in a slide. So, the value of the varied properties that Tesco owns has fallen over the year. That the write offs used to adjust the profits and which lead to the 50% fall. This is obvious, pointed to and as it is a one off doesn't, in fact, really change the overall value of Tesco as a business that much. That is, we don't think that profits will be down 50% next year and beyond for the same reason.
Tesco share price from London Stock Exchange
However, there's something more important in there. Corporate results are not inflation adjusted. So, sales are up 7.2%. But inflation is more than that - so the business is shrinking in real terms. UK sales seem to be up 3% and UK inflation for food was well over 12%. So we can even - if we wish to be extreme - think of the core UK business as having shrunk by 9% on a very rough basis. That's a very much worse result than initial views would seem to support.
What now matters is whether the market does adjust those numbers for inflation or not - that's something that could go either way.
