Tags: Tesco | Accounting | Chairman | Step Down

Tesco Accounting Black Hole Deepens, Chairman to Step Down

Thursday, 23 October 2014 10:01 AM

The chairman of Britain's biggest grocery chain, Tesco, announced his resignation on Thursday after the company reported a bigger than expected hole in its finances and said accounting transgressions went back further than initially thought.

Tesco, Britain's biggest private employer and once the juggernaut of its retail sector, has lost half its market value this year after the accounting errors compounded a succession of profit warnings.

New chief executive Dave Lewis, just seven weeks into the job, said he could no longer provide a full-year profit forecast because he did not know the full scale of Tesco's problems or how much it would cost to rebuild the firm.

With net debt rising, the pension deficit expanding and business in its home market deteriorating rapidly, the 95-year-old group, the third largest grocery chain in the world, said it was looking at all options to raise cash.

Lewis, 49, told investors there were no easy answers and they should not expect the presentation of a single new over-arching strategy but rather a series of incremental improvements that would be felt over time.

Shares in the group fell 5.7 percent to an 11-year low, wiping 800 million pounds ($1.3 billion) off its market capitalization.

"Our business is operating in challenging times," said Lewis, who joined Tesco from one of its main suppliers, Unilever . "Trading conditions are tough and our underlying profitability is under pressure."

"The U.K., the balance sheet, trust and transparency and the brand of the business will be the priorities for now."

Chairman Richard Broadbent, accused by many investors of poor corporate governance during his three-year tenure, said he planned to step down once the new management and business plan were in place.

Tesco said the overall impact from the incorrect booking of income was 263 million pounds ($421 million), up from an original estimate of 250 million pounds. When adding one-off costs such as the accounting hole and an impairment charge, its first-half profit was down 91 percent.

Of the 263 million pounds, around 145 million came from prior years, Tesco said. A spokesman said the figure was not big enough to require those previous results to be restated. The accounting mistakes will affect Tesco's second half, however.


Tesco, founded by Jack Cohen on a market stall in east London in 1919, grew rapidly through the 1990s to dominate the British high street under the stewardship of Ian MacLaurin and Terry Leahy.

But it lost its way in the late 2000s as it cut back on investment at home to expand abroad. It then further damaged its appeal by favoring investors over shoppers with price hikes during the economic downturn in an attempt to shield profits.

To compound matters, a group once renowned for its ability to gauge the needs of the British shopper failed to adapt quickly enough to changing habits.

Tesco now finds itself squeezed by fierce competition from discounters Aldi and Lidl at the lower end of the market, and by rivals such as Waitrose and Marks & Spencer at the top.

The big out-of-town stores it long championed are now also out of fashion, with more people preferring to shop little and often at local stores or online, meaning the group is set to report its third straight year of decline in trading profit.

Billionaire Warren Buffett recently cut his stake in Tesco to less than 3 percent from 4 percent after calling the purchase a "huge mistake."

"Tesco doesn't need to be the big sprawling business that it is," another large shareholder told Reuters on condition of anonymity. "They should be in contraction mode.

"(The accounting issue) is still pretty horrible ... and it's not closed off yet."

The results showed the scale of the crisis.

Second-quarter organic sales in Tesco's home market, excluding fuel and VAT sales tax, fell 5.5 percent. That compared with a 3.8 percent drop in the first quarter, which was described at the time as the worst performance in 40 years.

Net debt rose to 7.5 billion pounds from 7 billion pounds a year earlier, and compared with an equity value of 14 billion pounds. The pension deficit ballooned by 800 million pounds in six months to 3.4 billion pounds.

"Tesco has had quite a few years of challenge and disappointment," said Shore Capital analyst Clive Black. "However, we can never recall a period so damaging to the reputation of the company as the first half, 2015."


Asked if he would need to turn to shareholders for cash, Lewis said the group was reviewing all options, but that it believed it could raise significant funds by saving costs and selling assets, before a capital raise would be considered.

That is likely to be popular with investors who have told Reuters they would rather the group sold or floated assets, such as its operations in Asia and central and eastern Europe, before they would consider a rights issue.

Lewis said he had been visiting his British stores to get an idea of how shoppers view the retailer, but that the accounting probe had left him with no time to visit stores abroad, which he planned to do next week.

Tesco Asia, one of the assets that could be sold or spun off, saw trading profit fall 9.2 percent. The Europe business was up 42 percent, but that was from a low base, and it is thought to have fewer potential buyers.

Tesco Bank reported strong results.

Tesco said last month it had discovered an overstatement in its first-half profit forecast of 250 million pounds due to the way it booked payments from deals with food suppliers. Having been tipped off by a whistleblower, Lewis called in accountants and the lawyers Freshfields to investigate.

Having captured 6.3 million documents and reviewed 18,000 invoices, it said on Thursday that the overall impact had now risen to 263 million pounds. There was no evidence of material issues outside of the British food business and no one had gained financially from the overstatement, Lewis said.

Eight senior members of staff, including U.K. managing director Chris Bush, have been suspended, in a serious blow to a firm as it gears up for the key Christmas trading period.

Bush and the suspended staff have not commented publicly on the issue. The internal investigation has now been shut, leaving Britain's financial regulator (FCA) to investigate how the malpractice came about.

"The Deloitte investigation established the 'what,' the size of the issue," Lewis said. "The FCA will establish the 'why' and the 'how,'" he said, adding that Tesco did not expect, at this stage, to book any further charges in connection with the issue.

© 2020 Thomson/Reuters. All rights reserved.

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The chairman of Britain's biggest grocery chain, Tesco, announced his resignation on Thursday after the company reported a bigger than expected hole in its finances and said accounting transgressions went back further than initially thought.
Tesco, Accounting, Chairman, Step Down
Thursday, 23 October 2014 10:01 AM
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