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Tesco: Profits slide, chairman quits, shares fall, confidence sinks: New disclosures in accountancy fiasco add insult to store's injuries(Guardian (UK) Via Acquire Media NewsEdge) Tesco's profits for the first six months of 2014 have been nearly wiped out by the toxic combination of the recent accounting scandal and slumping sales at its declining UK store empire. In another dark day for the supermarket giant the accounting fiasco claimed the scalp of chairman Sir Richard Broadbent and the company said it was withholding million pound payoffs to its former chief executive Philip Clarke and finance director Laurie McIlwee until an investigation into its mis-stated accounts by the City watchdog was complete. Pre-tax profits crashed 92% to just pounds 112m as Britain's biggest retailer revealed the month-long investigation by the accountancy firm Deloitte had found a bigger hole in its books than previously thought. More damagingly, Tesco claimed that the rogue accounting practices - which relate to how the supermarket banks payments from suppliers - dated back at least two years. Confidence in what was once one of the most respected companies in the FTSE 100 was further rocked by an admission it could no longer estimate how much profit it would make this financial year as there were too many uncertainties surrounding its future direction. Its shares slid more than 6% to 171p, wiping another pounds 1bn off the value of the business. Tesco is now worth just half of its value in January. In the wake of the update Fitch and Moody's, the ratings agencies, downgraded the chain's credit rating to just one notch above junk - which is likely to increase the company's borrowing costs. Clive Black, retail analyst at City stockbroker Shore Capital, welcomed the chairman's departure because "a powerhouse of international retailing has been reduced to a rudderless corporate entity" on his watch. Black said the fact that the accounting scandal, first uncovered a month ago, stretches back further than just this year was also a matter of concern. Tesco is losing shoppers in the face of a fierce price war being waged by rivals and fast growing discount chains Aldi and Lidl. Its like-for-like sales - which exclude gains from new shopfloor space - tumbled 5.5% in the final three months of the period. Profits in the UK more than halved to pounds 499m as falling sales and lower profit margins, on the back of a round of price cuts launched in the face of a mounting supermarket price war. Chief executive Dave Lewis, who had never worked in the retail business until he joined Tesco in September, said: "I think we've got to be a little bit disappointed. Relative to the market, we've not been as competitive as I would have liked us to be." He suggested the supermarket had lost touch with its shoppers: "I think at Tesco we lose our way when we don't let the customer guide us." Tesco also has substantial problems overseas with underlying sales falling in eight out of 10 of Tesco's international markets . As part of the accounting investigation Deloitte demanded to see more than 6m documents and have pored over more than 700 supplier invoices to gain a true picture of the retailer's finances. It has now handed over its report to the Financial Conduct Authority. The FCA has the power to prosecute executives who make deliberately or recklessly misleading statements to the stock exchange. Prompted by information from a whistleblower, the investigation triggered the suspension of eight senior executives including Chris Bush, the head of the UK food business, and they have not yet been reinstated. Clarke remains on the Tesco payroll, being paid his pounds 1.1m salary until January. McIlwee has now left the business and was due his near-pounds 1m golden goodbye this month. Deloitte's team of forensic accountants established that the estimate of first-half profits Tesco gave the City back in August had been artificially inflated by pounds 263m, rather than the pounds 250m originally estimated. The inquiry has focused on the timing of supplier payments linked to in-store promotions that are often arranged months in advance. In its report Deloitte said supplier payments had been "pulled forward or deferred" in a manner that was contrary to Tesco's accounting policies. It also found there had "been similar practices in prior reporting periods" and that the sums "pulled forward grew period by period". Some analysts have speculated that increasingly desperate executives were pulling forward payments in order to paint a more flattering picture of the supermarket's deteriorating finances. Lewis dismissed the idea that fraud was involved in the accounting blunder: "Nobody gained financially as a consequence of the overstatement of performance." Broadbent, who said he would quit when a replacement was found, has presided over a catalogue of disasters at the retailer which has issued five profit warnings in the last two years. Nonetheless Broadbent insisted he hadn't been forced out: "I didn't have to go, I'm not being pushed out. I'm going because I choose to go." The decision to bow out reflected "the important principle of accountability", he added. The accounting issue aside Lewis has plenty of other fires to fight. The company is hobbled by pounds 7.5bn of debt, a mushrooming pension deficit and, most pressingingly, the collapse in profits in its important home market. The combination means Lewis is being forced to look at all options to raise cash. It has a large operation in Asia, that would be prized by investors, but also has other assets such as Dunnhumby, the data giant behind Clubcard, that it could sell. The executive refused to rule out a cash call on shareholders: stating "never say never". To turn around the Tesco supertanker Lewis knows he has to lead by example. He has already dispatched 2,500 head office staff to work in its stores for one day a fortnight in the run up to Christmas and revealed, that when possible, he is ditching his chauffeur to take public transport. His thriftiness is in contrast with Clarke whose largesse saddled the company with a new $50m (pounds 31m) Gulfstream G550 corporate jet which Lewis has put up for sale. Captions: Chief executive Dave Lewis, who joined Tesco last month, says the store must connect with its customers or risk losing its way United Kingdom 4.6% last 6 months 5.4% last 13 weeks Ireland 6.4% 7.3% Thailand 5% 4.7% Malaysia 4.7% 6.8% Slovakia 5.2% 4.6% (c) 2014 Guardian Newspapers Limited. |