Tesco reports bigger-than-expected hole in finances

Tesco reported a bigger than expected hole in its finances today after finding accounting mistakes had gone back further than initially thought, forcing Britain's biggest grocer to scrap its full-year profit outlook.

The company also reported another drop in sales across its Irish network of shops and petrol stations.

Tesco, once the unstoppable juggernaut of the British retail sector, has lost half of its market value this year after the accounting misstatement compounded earlier profit warnings to create a sense of panic at Britain’s biggest private employer.

Chief executive Dave Lewis, drafted in on September, said he could no longer provide a full-year profit forecast because he did not know the scale of Tesco’s problems or how much it would cost to rebuild the world’s third largest grocer.

The retailer also reported that like-for-like sales in Ireland dropped by 6.4 per cent in the six-month period from February. The company, which employs nearly 15,000 people across its network of 146 stores and 22 petrol stations here, posted revenue for the period of €1.3 billion.

Tesco Ireland’s chief executive Phil Clarke said: “Over the last six months we have improved our low prices through Price Promise, Staying Down and by accepting competitor coupons so that our customers know that they are getting the overall best value, range and experience when they shop in Tesco.”

With net debt rising, the pension deficit expanding and trading in its home market deteriorating at an alarming rate, the 95-year-old group said it was looking at all options to raise cash. Its shares fell 6 per cent to an 11-year low.

“Our business is operating in challenging times,” said Mr Lewis, who joined Tesco from supplier Unilever. “Trading conditions are tough and our underlying profitability is under pressure.” “The UK, the balance sheet, trust and transparency and the brand of the business will be the priorities for now,” he said.

Tesco said the overall impact from the incorrect booking of income was £263 million, up from an original estimate of £250 million pounds but that nobody had gained financially from the overstatement of profits.

Mr Lewis (49) said investors should not expect the presentation of a single new strategy; rather, a series of incremental improvements that would unfold over time. Richard Broadbent, chairman since 2011, said he would step down when Tesco’s management transition was complete and its new business plans were in place.

Having grown rapidly through the 1990s, Tesco 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 favouring investors over shoppers with price hikes during the economic downturn in an attempt to shield profits.

The group is now being squeezed by fierce competition from discounters Aldi and Lidl at the lower end of the market as well as by rivals such as Waitrose and Marks & Spencer at the top, and by changing British shopping habits.

The big out-of-town stores it long championed are now 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. “

Tesco doesn’t need to be the big sprawling business that it is,” one of the group’s largest shareholders told Reuters on the condition of anonymity. “They should be in contraction mode. “(The accounting issue) is still pretty horrible ... and it’s not closed off yet.”

Reuters