22nd Sep 2014 09:24
LONDON (Alliance News) - Britain's biggest supermarket chain Tesco PLC stunned the market Monday after it said it had overstated its first half pretax profit guidance by GBP250 million, and it has suspended four executives while it undertakes a thorough investigation into the issue.
Tesco shares opened 11% lower Monday, an 11-year low, as just over GBP2 billion was wiped off its market capitalisation.
In a serious blow to the struggling grocer's reputation and its first public announcement under new Chief Executive Dave Lewis, Tesco said it has launched an investigation into whether any staff have broken any rules, and it has suspended a number of people from duty, including four executives.
"We have asked four people in the organisation to step aside. I want to confirm that has nothing to do with disciplinary. I am not going to talk about named individuals," Lewis told journalists. He said that the problem with the audit figures was uncovered on Friday, after an "informed employee" bought it to the attention of the general counsel.
Tesco did not confirm whether one of those employees suspended was UK Managing Director Chris Bush, but confirmed that Robin Terrell has been bought on board to run the UK management team.
Tesco is currently without a finance director. Outgoing CFO Laurie McIlwee has not been in the office for some time and has not been involved in recent weeks, Tesco said, while incoming CFO Alan Stewart is not due to start until December 1. Tesco poached Stewart from Marks and Spencer Group PLC, where he was CFO.
The supermarket chain said it is "exploring all possibilities", including whether to also bring in Stewart earlier than planned.
Tesco said the profit guidance overstatement for the six months to August 23 was due to the "accelerated recognition of commercial income and delayed accrual of costs", which it said was due to its relationship with its suppliers, and the payment it receives from them. It said the focus is on its UK business.
Lewis did not say whether the GBP250 million figure given could increase. "We have given the best indication we can, given the best information we have at the moment," said Lewis.
This means Tesco's profit for the first half ended August 23 will be only around GBP850 million, well below the GBP1.1 billion it had guided last month. That was its most recent profit warning, following profit expectation downgrades earlier in the year.
Tesco made a GBP3.32 billion trading profit in the whole of its last financial year, and GBP1.59 billion in the first half of that year.
The company did not say whether the GBP250 million figure was a hole in its profit, or just about revenue timing, and therefore a delayed profit.
Tesco last month brought forward the start date for Lewis and tasked him with conducting a review of the whole group, after it slashed its interim dividend, cut its capital expenditure plans, and said it expects trading profit to be significantly lower than last year. The grocer said at the time that trading conditions have remained challenging and that its ongoing investments in its customer offer - which includes big price cuts - have weighed on its expected performance.
"We have uncovered a serious issue and have responded accordingly. The chairman and I have acted quickly to establish a comprehensive independent investigation. The board, my colleagues, our customers and I expect Tesco to operate with integrity and transparency and we will take decisive action as the results of the investigation become clear," Lewis said in the statement Monday.
Tesco said some of the "overstatement" includes in-year timing differences. The grocer chain said it is working to establish the extent of these issues and what impact they will have on the full year.
"The board has asked Deloitte to undertake an independent and comprehensive review of these issues, working closely with Freshfields, the group's external legal advisers," the company said.
Tesco is usually audited by another one of the "big four" audit firms, PricewaterhouseCoopers.
"Let's find out what has happened here, and then with full facts we can say what went on, and why it went on," Chairman Richard Broadbent told journalists.
"You need to decide whether I am part of the problem or part of the solution to the problem," Broadbent said after he was asked whether he would resign depending on the outcome of the findings.
Broadbent said the investigation will be focused on the first half of the current financial year, but would look further back "if needs be".
Tesco did not say when the investigation will end, but said it will provide a further update at its interim results on October 23. It had previously been due to report its interim results October 1.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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