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Tesco
Tesco store in London. Photograph: Luke Macgregor/Reuters
Tesco store in London. Photograph: Luke Macgregor/Reuters

Tesco’s profits black hole bigger than expected and runs back several years

This article is more than 9 years old
Supermarket, which is unable to provide any guidance on full-year profits, also said its under-fire chairman Sir Richard Broadbent is to resign

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Tesco has revealed that the hole in its first-half profits is bigger than previously thought and runs back into previous financial years, plunging the embattled supermarket into fresh turmoil.

Confidence in what was once one of the most respected companies in the FTSE 100 was also dealt a fresh blow by the admission that it was unable to provide any guidance on full-year profits because of a number of uncertainties, sending its shares down 6% to 170p.25p when the stock market opened. The company’s shares have almost halved in value since the start of this year.

It also revealed that its under fire chairman, Sir Richard Broadbent, is to be replaced, after a disastrous three-year tenure.

Tesco said the month-long investigation by forensic accountants from Deloitte had established that its first-half profits had been artificially inflated by £263m, rather than the £250m the company had originally estimated. The problem relates to when the retailer books payments received from suppliers who pay the big grocery chains to run in-store promotions on their behalf. Deloitte said £118m of the figure related to the first six months of the current financial year but that £145m related to previous years.

Tesco’s chief executive, Dave Lewis, said the Deloitte report would be passed to the Financial Conduct Authority and that from the company’s perspective this “drew a line” under the issue. With that out of the way he outlined three immediate priorities: to restore the competitiveness of the core UK business, to protect and strengthen its balance sheet and to begin “the long journey of rebuilding trust and transparency in the business and the brand”.

The investigation, prompted by information from a whistleblower, has resulted in the suspension of eight senior executives, including Chris Bush, the head of the UK food business. Lewis, who has been in the job for less than two months, said they would remain on leave until the FCA had completed its own investigation into the accounting scandal. The regulator has the power to prosecute those who make deliberately or recklessly misleading statements to the stock exchange.

“The Deloitte investigation has established the what but the FCA investigation will establish the why and how,” said Lewis. He dismissed the idea that fraud may have been involved in the accounting blunder: “Nobody gained financially as a consequence of the overstatement of performance.”

Pending that outcome Tesco has withheld the near £1m payment due to be paid to Laurie McIlwee, the former finance director who resigned in April. It plans to do the same with the payoff of more than £1m due to former chief executive Philip Clarke when his so-called handover period ends early in the new year.

One of Lewis’s first acts when he started the job early last month was alerting the City to the discovery of the accounting irregularities. It has been an unwelcome distraction given that he was poached from Unilever to lead a turnaround of the trading performance of Britain’s biggest retailer, which has issued five profit warnings over the past two years.

Total sales in the UK declined by 2.6% to £23.6bn in the six months, with like-for-like sales for the final three months of the period down 5.5%. Trading profits in the UK more than halved to £499m as a result of falling sales and a sharply reduced trading margin on the back of a round of price cuts launched in the face of a mounting supermarket price war. On a statutory basis, pre-tax profits plunged 92% to £112m. Like-for-like sales were falling in eight out of 10 of Tesco’s markets, with only the Czech Republic and Turkey posting growth in the second quarter.

Shore Capital retail analyst Darren Shirley said the fact that the accounting issue related to more than just the first half of the year raised “all sorts of questions to our minds as to what has gone on in prior years”. He added: “We cannot, therefore, rule out that a lot of ground will have to be raked up with potentially time-consuming and damaging ongoing headlines for Tesco. If there is a silver lining here then it is that Lewis has acted quickly, decisively and that he is not associated with the practices.”

Faced with falling UK sales, the grocery giant has also slammed the brakes on the aggressive expansion that has underpinned its growth in its domestic market over the past 20 years. Shoppers are increasingly turning their backs on the big weekly grocery shop in favour of home delivery services, discount rivals Aldi and Lidl and local convenience stores. The trends have hit sales at Tesco’s big out-of-town supermarkets - its market share had declined from 30.1% to 28.8% in the past year - and it has recently taken the decision to mothball a number of big projects including a huge superstore on Margate’s seafront.

More on this story

More on this story

  • Black day for Tesco as profits fall by 92%

  • Tesco shares fall to touch 14-year low as annual profits face £500m dip

  • Tesco’s accounts: watchdog weighing up whether full investigation needed

  • Tesco in crisis: where’s the strategy?

  • Tesco’s sales slump will continue, predicts Standard & Poor’s

  • The Guardian view on Tesco’s auditing debacle: a systemic shambles?

  • Tesco updates City on profits black hole, as UK retail sales disappoint -- business live

  • Tesco timeline - the highs and lows of the UK's biggest retailer

  • May 2013 - the month when the UK supermarkets’ 30-year boom ended

  • Tesco CEO’s new era of peace and love will take time to work

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