Tesco has admitted that its first-half profits were overstated by an estimated £250m and called in Deloitte to undertake a “comprehensive review” of its accounts. Four senior directors have been suspended while the investigation is completed.
“We have uncovered a serious issue and have responded accordingly,” said Dave Lewis, who took over as chief executive of Britain’s biggest retailer by sales at the start of this month.
Shares in Tesco tumbled 11.3 per cent in early Monday trading in reaction to the revelation to 203.5p, an 11-year low. They later rallied to stand at 211.24p by early afternoon, down 8 per cent.
Tesco said the overstatement related to a trading update at the end of August, when it unveiled its biggest profit warning, cut its dividend and slashed planned investment.
At the time, it said trading profit – a measure of operating profit that excludes property gains and losses – for the six months to August 23 was expected to be in the region of £1.1bn.
This was overstated “principally due to the accelerated recognition of commercial income and delayed accrual of costs”, as well as timing differences. The problems were focused on the UK food business, the company said.
“Work is ongoing to establish the extent of these issues and what impact they will have on the full year,” Tesco said. It has delayed its interim results by three weeks to October 23, when it will update investors on the overstatement.
Tesco confirmed that four undisclosed senior directors has been asked to “step aside”. People close to the matter said those asked to step aside are Chris Bush, UK managing director, and Carl Rogberg, UK finance director. John Scouler, commercial director, and Matt Simister, responsible for group sourcing, have also been asked to step aside, these people added.
The company said Robin Terrell, multichannel director, would step in to run the UK leadership team. Jason Tarry, head of clothing, will assume responsibility for UK commercial.
Mr Lewis said: “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.”
Sir Richard Broadbent, chairman, and Mr Lewis told analysts that the investigation had been triggered by an internal whistleblower, stating that “an individual alarm bell” had gone off.
This prompted the retailer’s general counsel to approach Mr Lewis with a report on Friday afternoon, which immediately triggered an investigation over the weekend.
Analysts were told the misstatement related to Tesco’s financial arrangements with suppliers, which typically provide generous credit terms to big grocers in order to win contracts.
Sir Richard told analysts that this was “not a failure of financial oversight, this is something out of the ordinary course [of business]”. He denied that there had been a failure of governance.
Asked whether he would step down, Sir Richard said: “The shareholders will have to decide whether I am part of the solution or part of the problem. My intention is to continue to be part of the solution.”
He added: “When a big company like this goes through tough times, everyone has got to form an opinion about whether the board and the chairman who leads that board are addressing the issues or ducking the issues. I don’t think we are ducking the issues.”
Analysts were told that at this early stage of the investigation, the “majority” of the problems had occurred in the first half of Tesco’s trading year.
Tesco’s former finance director, Laurie McIlwee, announced his decision to resign and step down from the board in April after the retailer reported a second consecutive year of falling profits, but agreed to remain in his role until a successor was found.
In early July, Tesco announced that it had poached Marks and Spencer finance chief Alan Stewart. He is not due to start at the company until December 1, however. Tesco said that Mr McIllwee had been retained as a consultant.
For the past three months, the finance brief has been run by the chief executive’s office, supported by the finance department, one person familiar with the company said.
Phil Clarke resigned as chief executive in July following a profit warning. Mr Lewis, a senior Unilever executive, was announced as his successor – the first outsider to lead the company. He was due to join on October 1, but took up his position a month early.
One top 20 shareholder said “It is difficult to understand why this has happened. We want to speak to the chief executive to find out exactly what is going on.”
Another top 20 shareholder said: “It’s a real shocker. We are not clear what has happened here. It is too early to start calling for the chairman’s head or anything emotive like that, but we do want some answers. It has been one piece of bad news after another.”
Clive Black and Darren Shirley, analysts at Shore Capital, said: “These are serious times for Tesco and its shareholders. We are flabbergasted by this development.”
They said it might raise “much more fundamental questions over the chairman’s position and the nature, composition and extent of the board, which to our minds has been lopsided between executives and non-executive directors for far too long.”
Neil Saunders, managing director of retail consultants Conlumino said: “Mistakes do happen, but this gives the impression of a company that is not in full control of its internal procedures. It is just not what you expect from a company as large as Tesco.
“More significantly, it means that performance – which is already extremely weak – is actually much weaker than anticipated. This is something that will alarm investors and means that Tesco has much further to travel to recovery than first thought.”
The news comes as a further blow to Tesco, which has been losing market share in the UK in the face of fierce competition from Aldi and Lidl, the German hard discounters.
US fund manager Harris Associates– one of the group’s biggest investors – last month cut its stake in the retailer, citing an “unclear management direction and incoherent strategy”.
David Herro, Harris chief executive, said: “I suppose what we may now see is more radical change.”
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