Business

Tesco shares slump after raised profit error

  • 23 October 2014
  • From the section Business
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Media captionChief executive Dave Lewis says customers aren't turning their backs on Tesco

Tesco shares closed the day 6.5% down after the firm announced that its profits have been overstated by £263m.

That is up from an initial estimate made last month of £250m.

Those figures were released along with results for the first half of the financial year. They showed underlying profits slumped to £783m, down almost 47% on the previous year. Sales continued to fall.

Tesco also announced that chairman Sir Richard Broadbent will be leaving.

Those hoping that chief executive Dave Lewis would announce a new strategy to revive the retailer were disappointed.

"I will reveal the strategy to the customers before I reveal it to yourself," chief executive Dave Lewis told BBC business editor Kamal Ahmed.

He did say he would improve customer service by boosting staff numbers and reducing the range of goods on offer.

He said there was evidence that shoppers did not want Tesco's expanded range of products.

'Profound regret'

Sir Richard Broadbent said he was preparing to step down, although no date has been set for his departure.

"The issues that have come to light over recent weeks are a matter of profound regret. We have acted quickly to clarify the financial performance of the company," Sir Richard said in a statement.

"A new management team is in place to address the root causes of the mis-statement and to develop and implement the actions that will build the company's future," he said.

Philip Clarke, the former chief executive of Tesco, stepped down in July after the company announced a profits warning.

Tesco says that payment of his severance, widely reported to be worth £10m, will be delayed until the FCA completes its investigation into the overstated profit.

Investigation

Accountancy firm Deloitte has completed its investigation into Tesco's misreported profits.

It found that profits were overstated by £118m in the first half of this year, by £70m in the 2013-2014 financial year and by £75m before that.

Tesco had been doing deals with suppliers over promotions, which is commonplace for supermarkets, but it appears Tesco had been booking returns from those promotions too early, while pushing back the costs.

Eight executives have been suspended since that practice was revealed.

Tesco said there was no evidence of personal gain from the mis-statement.

Deloitte's report is being passed to the Financial Conduct Authority (FCA) and other regulators.

Image copyright Getty Images

Weak results

Meanwhile, Tesco's trading performance continues to deteriorate.

Like-for-like sales, which strip out new stores, fell 4.6% in the first half of the year and pre-tax profit slumped to £112m, down more than 90% on the same period in the previous year.

That profit number includes several one-off items, including an adjustment related to the overstated profit.

Underlying profit before tax was £783m, down almost 47% on the previous year, and a little less than analysts were expecting.

Ratings agency Moody's has downgraded Tesco's credit rating slightly, citing the reduced trading profit and "uncertainties" related to the regulator's investigations into its accounting problems.

It said how the supermarket giant "adapts to fundamental shifts within its home market" will be "critical".

Analysis: Kamal Ahmed, BBC Business Editor

The most chilling fact for Tesco in these results is not the collapse in profits, not the accounting mis-statements that appear to go back to at least 2012-13 (appalling enough as those are), it is the 4.6% annual decline in UK sales.

Customers are turning their back on Tesco which is no longer seen as the best of the Big Four for price or quality. Dave Lewis will have to make a big move on both to convince customers to try Tesco's again.

Tesco is the most significant victim of a huge structural change in the UK retail sector - online shopping; the breakdown of the Big Four's dominant position and customers who want smaller, daily top-up shopping. Many believe that a permanently smaller, less profitable Tesco is now a stark reality.

'Cause for alarm'

Analysts expressed concern over the accelerating fall in sales at Tesco.

Neil Saunders, managing director of Conlumino, said: "The ongoing scale of the decline - which accelerated in the second quarter of the trading period - does give cause for alarm. It also underlines how much the business needs to do in order to get back into growth."

Independent retail analyst Nick Bubb said: "It is interesting that Tesco feel unable to give any guidance on full-year profits, given all the uncertainties, and that there is hardly anything about the new strategy for the UK, apart from meaningless words about 'competiveness' and 'reviewing all strategic options'."

Other analysts think that Tesco needs to cut costs and question whether Dave Lewis can deliver that.

"Tesco needs to take an axe to costs now. It desperately needs to restore profitability and part of that is to slash its cost base. I see little evidence of this happening and fear that Dave Lewis is not a cost slasher," said analyst Louise Cooper.

"Tesco needs an Adam Crozier who turned the £1.1bn 2002 loss at Royal Mail into profits a few years later," she added.

Ms Cooper also highlighted that Tesco's profit margins are falling and debt is rising.

It was thought that Tesco would try to raise more money from shareholders to help pay for a revamp of its business.

But chief executive Dave Lewis said the company is not working on a so-called rights issue at the moment, but he did not rule one out in the future.

Instead, Mr Lewis plans to cut costs and sell assets to boost Tesco's finances.

Tesco timeline

17 April 2013: Tesco announces first fall in annual profits in almost 20 years, as it pulls out of the US.

16 April 2014: Tesco sees profits drop 6% as earnings fall for second year

21 July: Chief executive Philip Clarke says he will step down after failing to turn around the company's fortunes. His replacement will be Dave Lewis of Unilever.

29 August: Shock profit warning and interim dividend cut. Dave Lewis' start as chief executive is brought forward by one month.

1 September: Dave Lewis starts as chief executive

22 September: Profit hole of £250m discovered. Four senior managers asked to step aside while investigation is carried out.

7 October: Fifth executive asked to step aside

14 October: Three more executives suspended, taking the total to eight.

23 October: Profit hole revealed to be £263m, chairman Sir Richard Broadbent announces departure.

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