Tesco pre-tax profits fall 92% as chairman Broadbent quits - UPDATE
First-half trading profits for Tesco beat analyst forecasts and chairman Sir Richard Broadbent responded calls for his head announced his own succession process had begun, but a headline fall of 92% in pre-tax profits shocked investors and led to the shares opening lower.
First-half trading profits at constant exchange rates of £937m were down 39.4% and management did not provide a full year profit forecast. Core earnings per share of 27.9p beat expectations.
Tesco's UK like-for-like sales were down 4.6% in the 26 weeks ended 23 August 2014 due to competition in the UK grocery market. Total sales of £34.0bn were down 2% at constant exchange rates at 4.4% at real rates.
The impact of the profit overstatement, the 'black hole' in its accounts, has been confirmed as £263m, slightly more than the £250m originally reported.
Tesco indicated that the accounting problems predated this period as only around £118m of the profit overstatement was from this financial year, with £70m relating to the 2013/14 period and £75m to “pre-2013/14”. But on the upside, after 18,000 invoices across the group were reviewed and 500 analysed in detail, there was no evidence of the issue spreading overseas.
Looking to the second half, the company said it was reviewing all opportunities to generate value and create headroom. "Full year profitability could therefore be further impacted by actions we choose to take."
Chief executive Dave Lewis said provided little detail on his plans for the company in the results statement, as his personal review of the whole business was continuing, just explaining that three immediate priorities were already clear: "to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand."
UK trading profits were down 56% at constant rates and Asia down 9.2%. Tesco Bank was the only part of the company with positive growth, rising 15.9% to £102m.
Positive news for the group was that total UK online sales were up 11% and there was like-for-like sales growth of 0.8% in UK convenience stores.
The FTSE 100 company's cash flow plunged by £700m to £1bn and net debt soared by £500m year-on-year to £7.5bn, with the pension deficit surging from £2.6bn to £3.4bn.
Analysts noted that this comes as Tesco's cost of borrowing is also rising as credit ratings agencies chip away at its current BBB rating.
At the analyst presentation later, management quashed rumours of a right issue any time soon, but said "never say never".
There has been speculation that Tesco could spin off its Asian business into a company worth about £10bn, preventing a rights issue. Lewis also cited UK head office property assets could be sold and also did not rule out any asset sales, including its Dunnhumby data analytics and Clubcard unit, saying "everything is in review".
With Tesco management stressing the need to "do the right thing for customers", Shore Capital analyst Clive Black and his unsung sidekick Darren Shirley said they saw "a further risk of earnings downgrades".
With the previously announced 75% cut to the interim dividend to 1.16p and warnings of further headwinds and prioritisation of the customer, Black and Shirley expectat a similar cut to the full year dividend too.
They add: "We are surprised that capital expenditure is set to remain at £2.1bn. We had felt that this is a variable that could and needs to be managed down more aggressively; no doubt this will come up in analysts' questions as will the cost base and future dividend policy."
James Abbott, a trader at Accendo Markets, said the fall in organic British sales was "the worst performance in 40 years" and does not sit well with traders across the city. Abbott noted the public dumping of shares by Blackrock and Warren Buffett and a further £13m on top of the £250m accounting black hole sees the shares back around multi-year lows.
"Why would anyone take a risk on a company that continues to disappoint in this manner? Fortune often favours the brave, but the stupid?" he wondered.
On valuation, IG analyst Chris Beauchamp noted that Tesco sits on a price to sales of 0.23, according to Bloomberg numbers, against 0.19 for Sainsbury’s and 0.21 for Morrisons, and 1.84 P/BV against just 1 for SBRY and 1.19 for MRW.
"So more declines to come while the giant plays catch up?" he wondered.