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UPDATE: Tesco Profit Hit Worse Than First Thought, Chairman To Depart
[October 23, 2014]

UPDATE: Tesco Profit Hit Worse Than First Thought, Chairman To Depart


(Alliance News Via Acquire Media NewsEdge) LONDON (Alliance News) - Tesco PLC Thursday said it overstated its first-half profit expectations by GBP263 million, higher than the GBP250 million it had revealed last month, and said Chairman Richard Broadbent will step down once the business is "back on track".



The news came as the UK supermarket giant reported a first-half trading profit of just GBP937 million, down 41% on the year before.

Britain's largest supermarket chain said the Deloitte investigation into its overstatement of expected half year profit has been concluded, with the "impact" confirmed as GBP263 million. Of that, GBP118 million related to this year's first-half trading profit, and the rest to prior years.


"The GBP263 million refers to the accounting issue which refers to the timing of commercial income," Chief Executive Dave Lewis told journalists Thursday.

Lewis said the Deloitte investigation determined exactly how much the overstatement was. However the UK Financial Conduct Authority investigation still underway will establish why and how it happened in the beginning.

"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," said Broadbent in a statement.

"Once this transition is complete and business plans are in place, it will mark the beginning of a new phase for the company, and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time," Broadbent added.

Broadbent said his decision to step down reflects the "important principle of accountability on behalf of the board".

Tesco reported a trading profit of just GBP937 million for the 26 weeks to August 23, down 41% on the GBP1.59 billion trading profit it reported a year earlier. Its pretax profit was GBP112 million, down a huge 92% on the prior year's GBP1.39 billion.

Tesco shares dropped at the open Thursday, trading 4.6% lower in early trading at 174.55 pence, the worst-performing stock on the FTSE 100.

Tesco said its interim profit was hit by a weakening UK grocery market, investments it is making in its customer offer, and challenging trading conditions overseas. Group trading margin was 3.04%, down 189 basis points year-on-year.

Group sales, including VAT, fell by 4.4% to GBP34.01 billion, from GBP35.58 billion the prior year. At constant exchange rates, sales were down 2% including petrol, and by 1.9% excluding.

UK like-for-like sales were down 4.6%, as the supermarket price war continued. Tesco is locked in a race to the bottom for price and promotions with rivals including J Sainsbury PLC, Wm Morrison Supermarket PLC and US-owned Asda.

The latest figures from market researcher Kantar Worldpanel earlier this week revealed Tesco's market share in the 12 weeks to October 12 slid to 28.8%, down from 30.1% a year earlier, while its sales fell by 3.6% in the period. However, while Tesco's sales are falling faster than its other rivals, its market share was unchanged from the previous 12 week period, and its sales decline slowed.

"Our relative performance was not competitive enough in the first half of the year, and the business continues to face a softening market and tough trading conditions, particularly in the UK. In this challenging environment, we will continue to invest for customers," Tesco said in its statement Thursday.

However, Tesco also has problems abroad. Its Asia trading profit fell by more than 17% at actual rates in the period, hit by tough market conditions in Korea, Malaysia and Thailand. In Europe its trading profit rose 38.2%, but largely on the back of a lower depreciation charge following last year's asset impairments.

The release of the company's interim results were delayed by three weeks after it discovered an "accounting issue" back in late September, when it rocked the market by saying it had overstated its first-half profit guidance by around GBP250 million and had launched an in-depth investigation.

It was a serious blow to the struggling grocer's reputation and was its first public announcement under new Chief Executive Dave Lewis. Tesco's share price has plunged since the revelation.

The complexity of the accounting investigation intensified, as the grocer suspended a number of executives, investigations were launched by a number of regulatory bodies, and media reports surfaced that the investigation had found evidence of "inappropriate behaviour" by staff.

Lewis moved to quash those "rumours" Thursday, telling journalists that there has been no evidence that the 'accounting issue' was used for personal gain.

Tesco also said it has held-off from paying off ex-CEO Philip Clarke and former finance director Laurie McIlwee while it sorts out the business and its balance sheet.

Its been a turbulent year so far for Tesco, which only a few months ago slashed its interim dividend, profit expectations and cut its capital expenditure plans, as it said challenging trading conditions and investment in bigger price cuts would weigh on its performance.

Just last week, billionaire investor Warren Buffett cut his stake in Tesco to less than 3%. Berkshire Hathaway PLC, the holding company controlled by Buffett, now holds only 245 million shares in Tesco, compared to a near 4% stake prior to the sale. Earlier this month, Buffet had described his investment in the supermarket company as a "huge mistake".

Tesco Thursday declared an interim dividend of 1.16 pence, slashed 75% from a dividend of 4.63p the prior year.

Management said it has three main priorities in focus to get the business back on track: rediscovering the competitiveness of the business, rebuilding trust and protecting the balance sheet.

"Whilst my review of the whole business continues, three immediate priorities are clear: to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand," said Lewis.

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