23rd Oct 2014 13:54
LONDON (Alliance News) - Tesco PLC Chairman Richard Broadbent Thursday said he will step down once the new management team has settled in, but he claimed he thought the board was "well governed" even though the company admitted its recent profit overstatement was worse than first thought and the issues that caused it had been going on before the first half of this year.
The struggling retailer said Deloitte had completed its investigation into the overstatement of the half-year profit expectation and confirmed an impact of GBP263 million, slightly more than the GBP250 million impact the retailer had announced last month. It said GBP118 million related to this year's first-half trading profit, about GBP70 million to the last financial year and about GBP75 million to years before that, although it did not say just how far back the issues went. The whole figure has been included in its first half results.
"The GBP263 million practically all refers to the timing of commercial income," Chief Executive Dave Lewis told journalists Thursday.
Tesco admitted that some commercial income had been recognised in its accounts too quickly while accrual of costs in the UK food business had been delayed.
Broadbent told a room full of journalists at a press conference that he did not see any problems in the governance of the board, despite a messy transition period when Tesco was bringing in a new CEO and was left without a finance head, all around the same time.
"I believe the board was well governed," Broadbent boldly stated at the media briefing.
Lewis said that there was no evidence of "material issues" outside the UK business, and the company didn't need to restate prior year accounts.
Lewis said the Deloitte investigation determined exactly how much the overstatement was. However, he refused to go into any more detail about why it happened because the UK Financial Conduct Authority is still investigating that.
Broadbent will be stepping down once the investigation is completed, to help the retailer "draw a line under the past as it enters the next phase of its development".
"It's about taking accountability for the events that have happened. The board or the shareholding are not telling me to go, I am going on my own accord," Broadbent told journalists. "I made my own decision, and it was my decision."
Only a few weeks ago, Broadbent told journalists that investors and shareholders needed to decide whether he was "part of the problem, or part of the solution to the problem", when asked whether he would resign depending on the outcome of the findings.
"A new management team is in place to address the root causes of the mis-statement and to develop and implement the actions that will build the company's future," Broadbent said in Thursday's statement.
"Once this transition is complete and business plans are in place, it will mark the beginning of a new phase for the company, and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time," he added, without giving an exact timescale for his departure.
Tesco reported a trading profit of just GBP937 million for the 26 weeks to August 23, down 41% on the GBP1.59 billion trading profit it reported a year earlier. Its pretax profit was GBP112 million, down a huge 92% on the prior year's GBP1.39 billion.
Tesco said its interim profit was hit by a weakening UK grocery market, investments it is making in its customer offer, and challenging trading conditions overseas. Group trading margin was 3.04%, down 189 basis points year-on-year.
Group sales, including VAT, fell by 4.4% to GBP34.01 billion, from GBP35.58 billion the prior year. At constant exchange rates, sales were down 2% including petrol, and by 1.9% excluding.
UK like-for-like sales were down 4.6%, as the supermarket price war continued. Tesco is locked in a race to the bottom for price and promotions with rivals including J Sainsbury PLC, Wm Morrison Supermarket PLC and US-owned Asda. It's also fighting off market share losses to German discounters Aldi and Lidl at the bottom of the market, and up-market grocers Waitrose and Marks & Spencer Group PLC at the top end.
The latest figures from market researcher Kantar Worldpanel earlier this week revealed Tesco's market share in the 12 weeks to October 12 slid to 28.8%, down from 30.1% a year earlier, while its sales fell by 3.6% in the period. However, while Tesco's sales are falling faster than its other rivals, its market share was unchanged from the previous 12 week period, and its sales decline slowed.
"Our relative performance was not competitive enough in the first half of the year, and the business continues to face a softening market and tough trading conditions, particularly in the UK. In this challenging environment, we will continue to invest for customers," Tesco said in its statement Thursday.
However, Tesco also has problems abroad. Its Asia trading profit fell by more than 17% at actual rates in the period, hit by tough market conditions in Korea, Malaysia and Thailand. In Europe its trading profit rose 38.2%, but largely on the back of a lower depreciation charge following last year's asset impairments. During the first-half of this year, Tesco booked impairments on both its UK and European stores.
Lewis said the group is undertaking a full review of its portfolio of businesses, and did not rule out either asset sales or a rights issue at some point in the future, although said it was not working on one at the moment. He said the retailer's balance sheet leverage is too high, and is considering "all options" to allow flexibility, including making sure its pension deficit is a "sustainable model going forward".
"The funding requirements will follow our strategic review. I will never say never to a rights issue, but I would like to clarify that is not something we are working on at the moment," said Lewis.
There has been speculation that Tesco could look to sell assets including its Blinkbox video streaming service, its Giraffe family-friendly restaurants, Dobbies garden centres and its Harris + Hoole coffe chain stake. The Daily Telegraph speculated its Asian business could be spun off, while Sky News also reported recently that private equity groups were circling its clubcard loyalty scheme in the hope it will be sold.
Lewis said he would not be giving anything away about the company's strategy, partly because that would tip off its rivals. He did say management were discussing whether price investments being made in the UK are in the right place and in the right categories.
"I'm not naive to the fact that the business is facing some challenges... I won't be revealing our strategy ever because it is not a competitively smart thing to do," Lewis said. "In terms of price proposition we have three or four things we are testing at the moment, so watch this space," he added.
"Whilst my review of the whole business continues, three immediate priorities are 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," said Lewis.
Lewis said he sees a "sea of opportunity" in the UK business, including the opportunity to improve service, availability of stock and its prices.
The release of the company's interim results were delayed by three weeks after it discovered an "accounting issue" back in late September, when it rocked the market by saying it had overstated its first-half profit guidance. Tesco's share price has plunged since the revelation.
It was a serious blow to the struggling grocer's reputation and was its first public announcement under Lewis, who had started a month earlier than planned at the beginning of September after it issued a previous profit warning in August, slashing its dividend and it capital expenditure plans.
Once the news of the profit overstatement broke, Lewis asked Marks and Spencer CEO Marc Bolland to allow former M&S finance chief Alan Stewart to start his new role at Tesco earlier too. Tesco brought in Stewart almost two and a half months earlier than originally scheduled.
The complexity of Tesco's accounting investigation has intensified, with the grocer suspending a number of executives, and as investigations were launched by a number of regulatory bodies.
Media reports surfaced that the investigation had found evidence of "inappropriate behaviour" by staff, but Lewis moved Thursday to quash the "rumours" of inappropriate behaviour, telling journalists that there has been no evidence that the 'accounting issue' was used for personal gain.
Tesco also said it has held-off from paying off ex-CEO Philip Clarke and former finance director Laurie McIlwee while the investigation is still ongoing. Under Clarke's contract, he was, and is being paid until January.
Earlier this month, Tesco moved to bolster its board, adding the chief executive of food services company Compass Group PLC and a former CEO of furniture and household goods retailer IKEA Group as non-executive directors. It had previously been criticised for not having enough retailing experience on the board.
"Board development is a continuing process," said Broadbent.
However, that wasn't enough to stop billionaire investor Warren Buffett from cutting his stake in Tesco to less than 3% last week. Berkshire Hathaway PLC, the holding company controlled by Buffett, now holds only 245 million shares in Tesco, compared to a near 4% stake prior to the sale. Earlier this month, Buffett had described his investment in the supermarket company as a "huge mistake".
Tesco Thursday declared an interim dividend of 1.16 pence, slashed 75% from a dividend of 4.63p the prior year.
Tesco shares dropped at the open Thursday, and were trading 5.8% lower Thursday afternoon at 172.35 pence.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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