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Tesco chairman to leave as black hole deepens

(Update with comment) Tesco's chairman is off after a 92% slump in profits and its new boss warns things could get worse.

 
Tesco chairman to leave as black hole deepens

News that Tesco’s profits overstatement was £263 million – £13 million more than it estimated a month ago – and stretched back at least two years was bad enough.

An investigation by auditors Deloitte revealed the escalation in the illusory profits that has taken place: £118 million in the first half of this year, having risen from £70 million in 2013 and £75 million in previous financial years.

The stricken supermarket will have to face its key Christmas trading period without the eight executives, including UK managing director Chris Bush, who stepped aside while Deloitte conducted its inquiry into the accounting scandal.

Moreover, hanging over it will be an investigation by the Financial Conduct Authority. It has been handed Deloitte’s findings into the way the company booked deals with food suppliers early and pushed back the recognition of costs in order to flatter profits.

Heading for the exit is the chairman, Sir Richard Broadbent (pictured), whose three years in office have seen the board fail to address the strategic challenges the supermarket faced – as Britons’ shopping habits changed – or spot the problems its desperate drive to maintain profitability was causing.

Broadbent expressed his ‘profound regret’, adding: ‘My decision reflects the important principle of accountability on behalf of the board and will support the company to draw a line under the past as it enters the next phase of its development.’

The blow for shareholders, however, is that a line is can't be drawn under its worsening financial plight. Tesco effectively scrapped its profits outlook today, with new boss Dave Lewis warning that full-year earnings could be hit as, Mario Draghi like, he does ‘whatever it takes’ to make the group competitive and trustworthy again.

Lewis’ actual words in the postponed half-year statement were: ‘Whilst my review of the whole business continues, three immediate priorities are clear: to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand.’

Having dealt with the accounting ‘black hole’ as much as he can, Lewis has given investors a black cloud of uncertainty.

Shareholders can surely expect a 75% cut in the final dividend to match the reduction of the interim payment and the sale of overseas businesses, such as its Asia operations, as it faces up to its debts (£3.4 billion pension deficit and £7.5 billion net borrowings) and throws everything into stopping the slide in its core UK market. A rights issue can't be out of the question, either.

Nearly all the figures in today’s statement were shocking.

In addition to the £263 million profit ‘adjustments’ there were £287 million of other impairments, including £136 million of lease charges as Tesco abandons its reckless store expansion programme. All told they showed half-year statutory profits had plunged 92% to £112 million from £1.38 billion a year ago.

The core of the problem, of course, is the horrendous trading position the company faces as it battles with the likes of Lidl and Aldi on one front, and Waitrose and Marks & Spencer (MKS) on the other.

Group sales fell 4.4% to just over £34 billion in the 26 weeks ending 23 August with margins sliding from 4.93% to just over 3%. This resulted in overall underlying profits falling 47% to £783 million.

The situation in the UK is even worse where trading profits, which exclude property costs, slumped 56% while its margin also more than halved to 2.3% as Tesco faced higher costs while cutting prices. As a result second quarter sales slumped 5.5%, an unprecedented low for the so-called market leader.

There were some bright spots, however. Online sales are up 11% and convenience stores managed a small 0.8% rise in like for likes, suggesting there is hope for the future. Tesco Bank also did well, with trading profits up 16% to £102 million.

But the shares (TSCO) tumbled 12p or 6.5% to 171p as investors baulked at what lies ahead.

Personally, as someone who joined the throng of private investors who bought the shares after the accounting scandal broke, I look at today's news with mixed emotions. I bought hoping I was a deep value investor whilst realising I could just be a Dumb Investor after all. Time will tell which it is! I still believe in Tesco as a long-term recovery story but perhaps I underestimated the scale of the challenge Lewis and his shrunken team face. On today's evidence it is going to be a long and rocky road back to recovery.

22 comments so far. Why not have your say?

Ed the 5th

Oct 23, 2014 at 08:51

And what will HIS step-down & redundancy package be?? Like similar others, I'm sure he won't end up on £70 dole &/or criminal charges. A few £million seems to be a standard reward for work grossly sub-standard.

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Dennis .

Oct 23, 2014 at 10:00

This is called getting the all of the bad news over in one go as soon as Dave Lewis joins. I can imagine that provisions have been made for everything they can think of to clear the balance sheet.

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Keith Cobby

Oct 23, 2014 at 11:13

Tesco are facing inexorable decline which is the normal fate for empires. They will have to sell parts of the business and shrink in size until they are small enough to be taken over or merged.

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Niven Financial

Oct 23, 2014 at 14:26

It is pretty obvious that none of the fund managers ( or punters ) that bought Tesco shares actually shopped in the store .

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Philip Masters

Oct 23, 2014 at 15:09

Ed the 5th

According to the website Broadbent's severence package is "rumoured" to be £10 million...absolutely scandalous. It is being held over until the FCA has reported. Just think of the pension funds and savings of ordinary people, and how they have been dented or destroyed by this man's incompetence...he should be behind bars.

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Philip Masters

Oct 23, 2014 at 15:10

BBC website I meant to have written.

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Correlationstreet

Oct 23, 2014 at 15:45

There was a Knight named Broadbent

Whose salary was heaven sent

He took Tesco to the brink

Caused a great stink

And now has time to repent

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cherrybowl

Oct 23, 2014 at 16:00

Well, doom and gloom guys-a thought- Tesco have the best trading positions for most of their stores (big or small) their operating logistics are totally intact and functional , a clean sweep of the old guard, new common sense management that will with time rebuild, because it actually is not rocket science to administer the remedies. If any business is worth a punt at the present level of share price -this it!

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alan franklin

Oct 23, 2014 at 16:37

Tesco could do what all British businesses should - but almost never -do. Talk to staff at the practical job levels: I mean store till ladies, not just managers.

From my experience those of us at the cutting edge of businesses - doing the job as opposed to talking about it - know more than all the analysts and strategic planners put together.

There is a wealth of untapped wisdom, ideas and information out there. Shame the big bosses seldom get to know it. Try talking to people instead of sending down directives from head office! Then you will know what customers and staff in the field are saying.

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Ed the 5th

Oct 23, 2014 at 16:52

Cherrybowl

Agreed - just don't reward incompetent &/or dishonest old guard with obscenely high pay-offs - so they can spend the rest of their lives in undeserved luxury.

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Mark22

Oct 23, 2014 at 17:06

Cherrybowl

The question is whether they have any other "accounting irregularities" to come.The dishonest old guard might not have been so incompetent as to leave everything to be discovered easily.

The new guard can manage a company in decline, even turn it around and (as you say) most of the processes aren't broke.

So, how much further will Tesco fall?

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Dennis .

Oct 23, 2014 at 18:26

No doubt Mr Broadbent will resurface somewhere with a new Chairmanship.

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Chris Kenney

Oct 23, 2014 at 20:40

Is here nothing in this country that is not rotten anymore?

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Rob Morrison

Oct 23, 2014 at 21:07

Tesco has treated it's customers & suppliers, with an arrogance, which has always been obvious. This attitude has just caught up with them.

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Robert18

Oct 23, 2014 at 21:16

Interesting comments guys, I am going to top up on my holding tomorrow and looking long term five to ten years. Just hope dividend is maintained even at the reduced level until they can get Tesco back to where it should be! as some of you have stated it's depressed rather than broken and I also like the financial side of the business and believe there is potential there moving forward.

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Dennis .

Oct 23, 2014 at 21:43

The 92% profit drop is just a headline. What has happened is absolutely classic textbook stuff . Lewis has no doubt demanded that every cost and provision that anyone can think of to be included in the half term numbers, it's the opposite of the £260m profit error problem. Woe betide any department head who comes in next week saying that we forgot to make a provision for xyz.

I have worked in companies who have had similar issues and the first thing you do is set up a "war room" to coordinate activity across the company to bring in the desired numbers. Managers will be being called every day for sales figures and to highlight problems. This is a company with strong cash flow (they get the money in before they pay their suppliers) and assets to sell. No doubt the profit margin will be cut and the prices fall, the business model will be changed and they will be back.

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Anonymous 1 needed this 'off the record'

Oct 23, 2014 at 21:45

One interesting point made elsewhere is that Tesco cannot go bust, it feeds about 30% of the population. The other supermarkets wouldn't have the capacity to replace it if it stopped trading and any merger/takeover proposal by the other major groups would trigger a monopolies issue.

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graham tilston

Oct 23, 2014 at 22:39

Tesco's policies have been incoherent. They have failed to take on Aldi/Lidl

Poundland et al. Their prices are all over the place. Price increases are between

10% and 50%. Misleading special offers. The boardroom living in a plastic bubble out of touch with reality. The new man Dave Lewis needs to visit all the UK stores and talk to staff and customers but above all LISTEN

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Trevor Coleman

Oct 25, 2014 at 11:00

It's probably been said, but I am amazed at the fact that the auditors have not

spotted the creative accounting apparently being used in connection with the booking of deals with suppliers and the recognition of costs, and for this to be recognised , seems to have required a special report by Deloittes. Is this acceptable auditing of a major company under current accounting standards?

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DEZ

Oct 25, 2014 at 16:57

Yet another "sir" found wanting for losing the plot whilst enjoying the

nice Board nuggets and pension trappings. Pity they did not earn

their keep and get off their butts and see what a mess their company was in on the ground floor.....bringing in suits who favour their own wallets to the wallets of faithfull shareholders and staff was always a recipe for disaster. Nice to see even Buffet the US guru got his fingers burnt on this crock of ###t# however it made him look human for a while.....I could not work out what he saw in Tesco that made him attracted to it. Still Tesco is getting to be a good share punt provided and IF they chose suits that really know how to run a company properly and spend time running the business rather than what colour leather to put in yet another company jet.

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Medussa828

Nov 14, 2014 at 20:14

Hopefully he left from the end of a boot the motley fool!

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Medussa828

Nov 14, 2014 at 20:44

Lol! You couldn't make it up .... Or could you .??!!!

Thanks also for the tip on Scottish Mortgage trust, spent hours last night scrutinising and it's definately one for the bag. Iam frustrated though that there's nothing truly racy around for enthusiasts of global income with a strong emerging markets theme....I am bursting with ideas but no one wants to think outside the box it seems...Bring on the choice, control and risk I say ....

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