Four senior Tesco executives are suspended after expected profits were overstated by £250m at Britain’s biggest retailer. What happened and why does it matter?
The executives have been suspended from Tesco and an investigation launched by auditors Deloitte after the supermarket giant’s half-year profit guidance was overstated by £250m.
Tesco Group Chief Executive Dave Lewis said: “We have uncovered a serious issue and have responded accordingly. The chairman and I have acted quickly to establish a comprehensive independent investigation.”
Even analysts do not know exactly. But profit expectations have apparently been “recognised too fast” and will in fact be lower by a quarter of a billion pounds. Recognition of income was said to have been “accelerated”, while costs of doing business were “delayed”, according to analysts.
So Tesco’s profit target of £1.1bn for this year was optimistic, and it should have been closer to £850m, which is about half of last year’s number.
“From the few sentences on the Tesco news release it is impossible to tell what is going on. But at the very minimum it tells of a company in crisis at board level”, said analyst and columnist Louise Cooper.
The news came as an enormous shock to the City. Tesco’s share price fell 10 per cent in morning trading, wiping millions from the price of the group. Shares are down a massive 40 per cent over the last 12 months, and there could be further trouble ahead.
Tesco has been in a cost-cutting battle with other retailers for a number of years, but its rivals have similarly seen their share price hit, with Sainsbury’s losing 24 per cent and Morrissons 32 per cent in the past year, so it is not just Tesco that is suffering.
But in its results last year a fall in pre-tax profits of £430m was reported, which it blamed on restructuring costs and steep profit falls across continental Europe and Asia. This was its first profits drop in 20 years, after the group spent £1bn in 2012 on store makeovers and was hit with the cost of closing its loss-making US business.
The chain is now experiencing its worst sales in decades. In 2014 its market share fell to the lowest level in decades at 28.7 percent, as it was hit by the success of Lidl, Aldi and Morrisons.
Analyst Neil Saunders, managing director of Conlumino, said: “It means that performance, which is already extremely weak, is actually much weaker than anticipated. This is something that will alarm investors and means that Tesco has much further to travel to recovery than first thought.”
On 23 October, interim results will be further updated and details may be provided then. Tesco’s Dave Lewis said: “The board, my colleagues, our customers and I expect Tesco to operate with integrity and transparency and we will take decisive action as the results of the investigation become clear.”
Analyst Clive Black at Shore Capital said: “Such an announcement is not the stuff of a well operated FTSE-100 organisation. These are serious times for Tesco and its shareholders. We are flabbergasted by this development.”
HURRY HURRY! Special deal on profit forecasts at Tesco! DOWN £250m to just £850m! While stocks (and shares in the company) last!
— David Schneider (@davidschneider) September 22, 2014
That Tesco announcement really is seismic. Its share price will be worth watching: http://t.co/nBY7248OQr
— James Ball (@jamesrbuk) September 22, 2014
Specilaist chocolate maker refuses to supply @Tesco after waiting five months to be paid – via @jameshurley http://t.co/L9NLIrvcyE
— Richard Fletcher (@fletcherr) September 22, 2014