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 Tesco, once the unstoppable juggernaut of the British retail sector,
has lost half of its market value this year after the accounting
misstatement compounded earlier profit warnings to create a sense of
panic at Britain's biggest private employer.
Chief Executive Dave Lewis, drafted in on Sept. 1, said he could no
longer provide a full-year profit forecast because he did not know
the scale of Tesco's problems or how much it would cost to rebuild
the world's third largest grocer.
With net debt rising, the pension deficit expanding and trading in
its home market deteriorating at an alarming rate, the 95-year-old
group said it was looking at all options to raise cash. Its shares
fell 6 percent to an 11-year low.
"Our business is operating in challenging times," said Lewis, who
joined Tesco from supplier Unilever. "Trading conditions are tough
and our underlying profitability is under pressure."
"The UK, the balance sheet, trust and transparency and the brand of
the business will be the priorities for now," he said.
Tesco said the overall impact from the incorrect booking of income
was 263 million pounds ($421 million), up from an original estimate
of 250 million pounds but that nobody had gained financially from
the overstatement of profits.
Lewis, 49, said investors should not expect the presentation of a
single new strategy; rather, a series of incremental improvements
that would unfold over time.
Richard Broadbent, chairman since 2011, said he would step down when
Tesco’s management transition was complete and its new business
plans were in place.
Having grown rapidly through the 1990s, Tesco lost its way in the
late 2000s as it cut back on investment at home to expand abroad. It
then further damaged its appeal by favoring investors over shoppers
with price hikes during the economic downturn in an attempt to
shield profits.
The group is now being squeezed by fierce competition from
discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL] at the lower end of
the market as well as by rivals such as Waitrose and Marks & Spencer
at the top, and by changing British shopping habits.
The big out-of-town stores it long championed are now out of
fashion, with more people preferring to shop little and often at
local stores or online, meaning the group is set to report its third
straight year of decline in trading profit.
"Tesco doesn’t need to be the big sprawling business that it is,"
one of the group's largest shareholders told Reuters on the
condition of anonymity. "They should be in contraction mode.
"(The accounting issue) is still pretty horrible ... and it’s not
closed off yet."
'CHALLENGE AND DISAPPOINTMENT'
The results showed the scale of the crisis facing Tesco's new boss
who admitted he had no quick answers.
First-half trading profit dropped 41 percent while second-quarter
organic sales in its home market, excluding fuel and VAT sales tax,
fell 5.5 percent. That compared with a 3.8 percent drop in the first
quarter, which was described at the time as the worst performance in
40 years.
Net debt rose to 7.5 billion pounds from 7 billion pounds the year
before and compared with an equity value of 14 billion pounds. The
pension deficit ballooned by 800 million pounds in six months to 3.4
billion pounds.
"Tesco has had quite a few years of challenge and disappointment,"
said Shore Capital analyst Clive Black. "However, we can never
recall a period so damaging to the reputation of the company as the
first half, 2015."
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Asked if he would need to turn to shareholders for cash, Lewis said
the group was reviewing all options. Large shareholders have told
Reuters they would rather the group sold assets, such as its
international operations, before they would consider a rights issue.
They would also want to see a full strategy for the group before
agreeing to a capital hike, but the discovery of the accounting hole
has pushed back the development of a turnaround plan.
Lewis, who said he had been visiting his British stores to get an
idea of how shoppers view the retailer, said the accounting probe
had taken up so much time that he had been unable to visit stores
abroad.
Tesco said last month it had discovered an overstatement in its
first-half profit forecast of 250 million pounds ($401 million) due
to the way it booked payments from deals with food suppliers,
sending shockwaves through the industry.
Having been tipped off by a whistleblower, Lewis called in
accountants Deloitte to carry out an independent investigation along
with legal advisers Freshfields.
It said on Thursday, having captured 6.3 million documents and
reviewed 18,000 invoices, the overall impact had now risen to 263
million pounds. There was no evidence of material issues outside of
the British food business.
Eight senior members of staff, including UK managing director Chris
Bush have been suspended, in a serious blow to a firm as it gears up
for the key Christmas trading period.
Bush and the suspended staff have not commented publicly on the
issue. The internal investigation has now been shut, leaving the
country's financial regulator (FCA) to investigate how the
malpractice came about.
"The Deloitte investigation established the what, the size of the
issue that we had," Lewis said. "The FCA will establish the why and
the how," he said, adding that they did not expect to have to take
any further charges in connection with the issue, at this stage.
Tesco said on Thursday of the 263 million pounds, around 145 million
pounds came from prior years. A spokesman for the firm said that
figure was not sufficiently large enough for the group to have to
restate those previous results.
The accounting mistakes will affect its second half however.
"We have a full business review underway," Lewis told reporters.
"We’ll reassess the capabilities we have and the assets we have and
we will redesign the strategy and the competitive position for Tesco."
(Additional reporting by Paul Sandle; Writing by Kate Holton;
Editing by Guy Faulconbridge and Anna Willard)
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