LONDON: Tesco slashed its profit forecasts for the fourth time in five months as its new boss took costly measures to rebuild the British grocer after its recent accounting scandal and dramatic loss of customers in an increasingly cut-throat market.
Shares in the world's third-biggest retailer plunged as much as 17 percent at one point on Tuesday to a 14-year low, wiping more than 2.5 billion pounds off its stock market valuation, after the group cut its full-year trading profit forecast by nearly a third.
It said group trading profit for its 2014-15 year would not exceed 1.4 billion pounds, below analysts' average forecasts of 1.94 billion pounds and less than half the 3.8 billion pounds it made in 2011-12. The company reported in September that it had overstated first-half profits by 250 million pounds -- a figure later raised to 263 million pounds.
After two decades of uninterrupted growth, Tesco has lost its way - distracted by an expensive overseas expansion strategy when it needed to respond to the rise of discount outlets that have changed its customers' shopping habits; and wrong-footed by a boom in convenience stores and online shopping that emptied its huge out-of-town sites.
Chief Executive Dave Lewis, who joined Britain's largest grocer the month it revealed mistakes in its accounting, said the new profit forecasts took account of the 500-million-pound cost of reworking its accounting policies and supplier relationships, recruiting additional staff to serve customers better, increasing the availability of its most popular lines, and lowering prices on those products.
Of the 500 million, he said one third related to re-setting the guidelines for dealing with commercial income from suppliers, and another third related to ceasing practices that "artificially change" the way the business operates, such as reducing staff numbers in the final quarter of its financial year before increasing them again in subsequent periods.
NOT OVER YET?
"It’s a big downgrade. We haven’t seen the full extent of what’s behind it yet and we won’t find out until January” said one major Tesco investor, noting Lewis had pledged to give more detail on Jan.8 of how he plans to improve trading and strengthen the firm's balance sheet.
"It could get worse," said the investor - noting that Tesco has so far shied away from starting a major price war - and adding: "Given what you've seen today it wouldn't be surprising if the final (dividend) was nil."
Tesco cut its interim dividend by 75 percent in October.
Industry data published last month showed Tesco's UK sales, which account for two thirds of group revenues, are falling at a greater rate than any of its main rivals -- Asda
Lewis told reporters Tesco could slash prices to try to catch up. "I reserve the right to invest more if I feel that I need to be more competitive," he said, noting the company's priorities were "restoring competitiveness in the UK, protecting and strengthening the balance sheet and rebuilding trust and transparency."
He said a review of Tesco's global portfolio of assets was continuing.
ACCOUNT CLEANSING
Tesco's accounting scandal led to the suspension of eight senior members of staff, including UK managing director Chris Bush, and sparked a series of investigations, including by Britain's Serious Fraud Office and possible investor lawsuits in Britain and the United States.
Bernstein analyst Bruno Monteyne, a former senior Tesco supply chain executive, said most commentators had assumed Tesco's profits would hit the trough in the next financial year, but that the "account cleansing" and higher investment had been brought forward.
He said the group had previously been known for "diving for the line" where it would reduce stock and staff towards the end of the year to meet its financial numbers.
Cantor Fitzgerald analyst Mike Dennis said he was penciling in just 15 million pounds of UK trading profit for Tesco's second half, down 98.6 percent.
At 1539 GMT, Tesco shares were down 7.5 percent at 173.2 pence, after touching a low of 155.4 pence. Shares in rivals Morrisons and Sainsbury's were down 4.4 percent and 0.7 percent respectively on fears Tesco could cut prices further.
Tesco's stock has lost about 52 percent of its value over the last year, compared with a rise of about 1 percent in Britain's blue chip FTSE-100 index <.FTSE>.
“While most investors are focussing heavily on the bad news, uncertainty and panic can create exceptional opportunities for long-term value investors like us,” said Ian Kelly, a European Equities fund manager at Schroders, Tesco's eighth-biggest shareholder.
Credit rating agency Moody's said its Baa3 rating for Tesco remained on review for downgrade.- Reuters
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