MarketLine Blog

Tesco: Fallout from profit overstating continues

Yesterday (September 22), the UK’s largest retailer Tesco had to make the embarrassing and damaging admission that its first half profits had been overstated by some £250m (approximately $390m). Consequently, profits for the period are now expected to be around £850m (approximately $1,328.8m) rather than the originally-reported £1.1bn (approximately $1.7bn); quite a difference. The fallout has been catastrophic and has prompted some serious questions that have led to staff suspensions, a delay in publishing its first half results, and the intervention of legal and accounting firms.

Following the shock announcement, shares in the supermarket operator plunged 11.1%, before eventually closing at 203p, 11.6% down on Friday’s (September 19) closing price. The share price crash has continued into today as Tesco lost another 8% before midday, equating to a market capitalization reduction of around £1.5bn  (approximately $2.3bn).

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Source: Yahoo Finance

 

Tesco has already launched an internal investigation into what has caused things to go so badly wrong. Having already issued two profit warnings this year, the one-time golden child of the UK retail sector could not afford such a calamity and CEO Dave Lewis is determined to get to the bottom of the issue.

In a move that shows just how seriously Lewis is taking the issue, four executives have already fallen victim to the profit debacle and been suspended. Although they have not officially been named, the BBC is reporting that they are UK finance director Carl Rogberg, its food commercial director John Scouler, head of food sourcing Matt Simister, and, most notably its UK Managing Director, Chris Bush.

Mr Lewis, who only joined Tesco three weeks ago after over 25 years at Unilever, has also enlisted the services of accountancy firm Deloitte and legal firm Freshfields to scrutinize the overestimate at its UK food business, raising questions over the retailer’s usual auditor, PwC. The Financial Conduct Authority, the City’s chief regulator has also been contacted by Tesco directly and the publication of its first half results has been postponed three weeks to October 23.

This all suggests that the company is not satisfied with the accounting and auditing methods employed to reach the erroneous numbers, something which goes against yesterday’s defence of a fairly normal accounting practice as Tesco said that the overstatement was “principally due to the accelerated recognition of commercial income and delayed accrual of costs”.

Officially however, Tesco remains tight-lipped and Lewis has so far refused to be drawn on the matter simply stating: “We are clear there is an issue here. We will let the investigation determine whether any rules were broken and what I need to do to address that.” What is clear is that Lewis, who must be given time in his role as CEO, is seemingly prepared to act tough if that is indeed what is required.

 

 

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