Tesco boss faces profits pressure


Published: Thursday 23rd October 2014 by The News Editor

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New Tesco boss Dave Lewis will be under pressure over plunging profits and a £250 million accounting scandal when the company publishes half-year results today.

The interim figures will come days after latest industry data showed Tesco’s sales falling at the fastest rate in the sector.

Trading profits for the period are expected to be down by nearly half to £850 million.

Mr Lewis is likely to face questions on how he plans to reverse the decline of Britain’s biggest supermarket, with one analyst urging him to go on the attack with a £3 billion strategy to turn around its fortunes over the next few years.

He is also expected to set out preliminary findings of an independent review launched last month – which has seen eight executives suspended – after Tesco admitted its profit expectations for the half-year had been overstated by £250 million.

The inquiry by accountants Deloitte and law firm Freshfields has been looking into the way the company treated rebates paid by suppliers and whether they were reported in the right time period. The Financial Conduct Authority is also investigating.

Reports suggest the independent probe will highlight inappropriate behaviour by some staff but that it was largely confined to the first half of this financial year. Sky News reported that the shortfall was likely to be lower than first expected, at between £220-£230 million.

The figures are being published three weeks later than first planned after the discovery of the accounting error, which resulted in the group’s third profits warning in as many months.

It came just weeks after Mr Lewis took over at the start of September from Philip Clarke, who departed after overseeing the company’s worst trading performance in four decades, a first quarter like-for-like sales decline of 3.7%.

Shares have fallen by around 25% since the end of August and by about half over the last 12 months.

Industry data from Kantar Worldpanel this week has indicated further gloom, with sales down 3.6% in the 12 weeks to October 12 and market share down to 28.8% from 30.1% a year earlier.

In August, Tesco said it would slash its dividend by 75% and cut store refit spending by £400 million a year with analysts at Cantor Fitzgerald estimating that the moves would give it a £1.3 billion war chest to face down rivals.

The group is caught in a price war as the major grocers – also including Asda, Sainsbury’s and Morrisons – battle the threat from discounters Aldi and Lidl.

HSBC analyst David McCarthy said Tesco needed to invest in price cuts of 5-6%, more store staff and food quality.

But he warned the turnaround could cost around £3 billion – more than expected pre-tax profits for the current year – and take more than five years.

Mr McCarthy concluded that Tesco could help pay for this with cost savings including a reduction in head office staff and by giving up a chunk of its profit margins – as well as by ditching its fleet of private jets.

He also said it should consider selling download service Blinkbox and a number of its overseas operations, and even ditching its loyalty card to help fund price cuts.

Mr McCarthy said Tesco could build up its war chest with a £3 billion rights issue and £7 billion from disposals.

“Tesco has been going wrong for at least six years and we think it will take just as long to correct the mistakes made in this time,” he added.

“However, we believe Tesco still has the scale and resources to be a potential long-term winner. Now would seem the right time for Tesco to attack.”

Published: Thursday 23rd October 2014 by The News Editor

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