March 29, 2024

Tesco shares tumble after company overstated profits by £250mn

Shoppers go into a Tesco store in Bow, east London August 29, 2014. (Reuters/Paul Hackett)

Shoppers go into a Tesco store in Bow, east London August 29, 2014. (Reuters/Paul Hackett)

The UK’s biggest supermarket chain Tesco suspended four executives, including its UK managing director, after it admitted it overstated profits for the first half of 2014 by almost a quarter.

The announcements
shocked investors, with shares dropping more than 11 percent in
early trading, before recovering slightly to around an 8 percent
fall. The stock price for Britain’s largest retailer by revenue
is down more than 43 percent in the last year.

Tesco is Britain’s largest private sector employer, with over
500,000 staff.

In August the company said its half-year profits would come to
around £1.1billion. That figure is now likely to be around £850
million, which is almost a quarter less than expected for the
period.

The company said in a statement: “On the basis of preliminary
investigations into the UK food business, the board believes that
the guidance issued on 29 August 2014 for the group profits for
the six months to 23 August 2014 was overstated by an estimated
£250m. Work is ongoing to establish the extent of these issues
and what impact they will have on the full year.”

Tesco asked Deloitte to undertake an independent review, in
cooperation with the group’s external legal advisers Freshfields.

“We have uncovered a serious issue and responded
accordingly,”
said Tesco Chief Executive Dave Lewis.
“The Chairman and I have acted quickly to establish a
comprehensive independent investigation.”

Lewis said on Monday that an “informed employee” had
notified Tesco’s legal team of the accounting error. Tesco said
it got its numbers wrong by overstating income and understating
costs.

The supermarket chain said it would now announce its interim
results on 23 October 2014, three weeks later than scheduled.

UK managing director Chris Bush has been suspended, according to
BBC Radio 5 Live. Sky News also reported that Carl Rogberg, Tesco
UK finance director, was among the four executives who have been
suspended.

The announcement also raises the question of why the company’s
auditors PricewaterhouseCoopers did not spot the error.

Tarnished reputation

Tesco’s previous chief executive Philip Clarke stood down in July
after his £1 billion recovery plan to revive the business failed.

Under Clarke, Tesco issued three profit warnings in two and a
half years as it lost UK market share to fast-growing German
discounters Aldi and Lidl as well as upmarket rivals like
Waitrose.

With a market valuation of £18.8 billion, Tesco reported two
decades of uninterrupted earnings growth. Since the profit
warnings and loss of market share its share price had fallen to
decade-lows.

Tesco faced a number of problems in the past year alone.

In January 2013, it emerged that food inspectors had found almost
30 percent horsemeat in one brand of burger sold by Tesco. Tesco
issued a nationwide advertising campaign apologizing for selling
beef burgers that were found to contain horsemeat. “We and
our supplier have let you down and we apologize,”
the ad
said.

Costly mistakes abroad, such as a failed US venture, also had a
negative impact on Tesco. In September last year the company sold
most of its loss-making US Fresh Easy stores to an
investment company.

Also in 2013, two Tesco pork chops labeled as British were found
to have come most likely from the Netherlands.

Shares in Tesco reached an 11-year low in August after it cut its
full-year profit forecast to £2.4bn from £2.8bn.

Analysts quickly reacted to the announcement. Shore Capital
analyst Clive Black said the development is surprising. “Such
an announcement is not the stuff of a well operated FTSE-100
organization,”
he said.


Article source: http://rt.com/business/189624-tescom-profit-error/

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