Tesco shares slump after further profits warning

Tesco today cut its annual profits forecast for the second time this year.

Tesco today cut its annual profits forecast for the second time this year. - Credit: PA

The troubles at supermarket giant Tesco deepened today as the company warned it is heading for a bigger-than-expected slide in annual profits.

Shares slumped by as much as 16% in early trading, wiping nearly £2billion from Tesco’s stock market value, after it said trading profits will not exceed £1.4bn in the year to February.

This is well below guidance in the City for a figure of £1.9bn and down from the previous year’s £3.3bn, which was achieved before this autumn’s damaging revelations about the overstatement of its earnings.

One City analyst said the latest figures suggested the company will barely make a profit from its UK business in the second half of the financial year.

In its fourth warning on profits this year, Tesco’s new chief executive, Dave Lewis, said that steps being taken to overhaul the group in the wake of the accounting scandal would hit short-term profitability.

He has taken temporary control of the supermarket’s day-to-day UK operations after UK managing director Chris Bush, one of eight who were asked to step aside in the wake of the scandal, left the company.

An investigation found that rebates from suppliers were moved to different periods on the company’s balance sheet, as far back as 2012-13 and possibly longer.

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Tesco said today that its new approach will be underpinned by stronger long-term relationships with its suppliers, while at the same time ensuring that the way it recognises revenue is “transparent and appropriate”.

Former Unilever boss Mr Lewis, who will give more details on his plans for the group in a trading update on January 8, said: “We will not engage in short-term actions that compromise in any way our offer for customers.”

Management have added more staff hours in the run-up to Christmas and invested in prices and short-term money-off vouchers in a bid to revive trading.

But Mike Dennis, a retail analyst at Cantor Fitzgerald, said he expected the recovery to take longer than expected as Mr Lewis has to simplify the UK business, then reconnect with suppliers by changing payment terms before starting on the long road to rebuilding the Tesco brand with shoppers.

As well as its internal difficulties, the UK’s biggest supermarket chain has been battling a fierce price war as discounters Aldi and Lidl continue to eat into its market share.

Tesco shares are now at their lowest level in more than a decade, with today’s slump wiping out a mini-recovery seen since the end of October.

Neil Saunders, managing director of retail consultancy Conlumino, said: “Tesco needs to invest in both pricing and improving the shopping experience for consumers. When such investment is made against a backdrop of falling sales it will inevitably impact profitability.

“However, such a move is a necessarily evil; the price of failing to accept a reduction in profit would simply be the continued deterioration of the business.

“The question is whether or not the measures Tesco is now taking will allow is to increase its market share once again. The answer is that it could but it is by no means guaranteed. The competitive environment in grocery is so intense that it is not possible for all players to grow.”