Ikea has swung back to a loss after an intercompany loan sank its earnings

Ikea Australia is racing towards $2bn in annual sales, but the Swedish retailer still can’t crack a profit due to hundreds of millions in unexplained expenses and a mysterious loan.

Ikea has booming sales in Australia but is struggling to make a profit due to fees and a mysterious intercompany loan.

Ikea, the Swedish furniture giant famous for its cheap flatpack furniture and meatballs served in its store cafeterias, has once again posted booming sales in Australia but seen its rich earnings plunged deep into losses due to a mysterious settlement of interest-free intercompany loans.

The retailer is quickly racing towards annual sales in Australia of $2bn and last year posted its largest profit since first opening here in 1975, but profits have been incredibly scarce, almost non-existent, with hundreds of millions of dollars in unexplained expenses, franchise fees and other accounting entries transforming huge gross profits into ever-growing net losses.

In 2022 after years of worsening losses despite its huge popularity in Australia and booming business across its 10 local big-box stores, Ikea’s Australian arm was finally profitable to post a $82m profit, up almost tenfold from the previous year and breaking a string of annual losses.

But, that profit now looks to have been only momentary.

In its latest accounts lodged with the corporate regulator, Ikea Australia has recorded a net loss of $48.496m for the 12 months to August 31, 2023, marking an almost $130m turnaround in profitability from its 2022 accounts.

Sales improved for 2023, hitting $1.781bn from $1.699bn in 2022. Ikea’s sales in Australia have more than doubled from $733m in 2014, but it couldn’t transform those rocketing sales into a bottom line profit.

The latest 2023 accounts explain that while Ikea Australia posted a gross profit of $706.112m its various expenses such as advertising, wages, rent and franchise fees narrowed that down to an operating profit of $91.39m.

But then all that was wiped away by a number of financial expenses, including a “loss from the derecognition of financial liability” of $145.497m and “financial expenses” of $16.7m.

The upshot was a total of $160.476m in losses hitting the bottom line, which then enabled Ikea Australia to produce a net loss of $48.496m.

The Ikea accounts directors’ report explains that the accounts included a non-recurring loss of $145.497m and associated tax benefit of $43.649m arising from “the early settlement of long-term interest free intercompany loans”.
On the final day of Ikea Australia’s financial year, August 31, there was a non-cash transaction where it issued 428.868 million ordinary shares to its parent, INGKA Holdings Overseas for $1 each. In consideration for these shares, a promissory note was received for the same amount.

That promissory note was then used to settle interest free loans payable to INGKA with a face value of $428.868m.

The difference between the face value of these loans and the carrying amount of the loans at the date of the settlement resulted in a loss of $145.5m on derecognition of that liability, the accounts explain.

In a statement on its website, Ikea Australia did not further explain the reason for the intercompany loan, but rather focused on its attempt to keep a lid on its retail prices in the face of cost of living pressures for its customers.

“While the cost of goods increased in fiscal 2023, where possible, we did not pass these costs on to customers. Instead, we kept our prices as low as possible, and lowered the prices of multiple products where we could.

“Affordability has never been more important than in the ongoing cost-of-living crisis, and we will continue to invest in lowering prices even further, and across more products in 2024.”

A Swedish flag at half mast outside an Ikea store in Stockholm, on January 28, 2018 after Ingvar Kamprad, the enigmatic founder, died aged 91. Picture: AFP

Ikea Australia recorded an income tax benefit of $20.589m in its 2023 accounts.

The report argues that excluding these items, Ikea Australia would have generated a profit after income tax of $53.352m.

In the last nine years, Ikea Australia has notched up more than $800m in expenses, which has shaved its pre-tax profit. In the past, these expenses and franchise fees shrunk taxable profit or swung it into a loss. In 2020, an 11.2 per cent rise in operating profit to $584.8m became a loss before income tax of $12.5m, as charges mounted.

Ikea founder, the late billionaire Ingvar Kamprad, gave away his business in the 1980s to the INGKA charity, which is dedicated to promoting and safeguarding the future of architecture and furniture. It has also given some money to help children in poorer countries.

In 2014, a document among the “Luxembourg leaks” reportedly showed that Ikea’s profit growth in Australia between 2004 and 2014 has trailed sales growth – or occasionally went in the opposite direction – as it reduced its taxable income by paying more than $2bn in franchise fees, licence fees and royalties to its European parent. These practices are not illegal.