The new head of Britain’s biggest retailer Tesco has suspended four senior executives and launched an independent investigation after the troubled supermarket revealed Monday it had massively overestimated profits.
Following initial investigations into its UK food business, Tesco said its profit for the six months to August 23 “was overstated by an estimated £250 million ($408 million, 318 million euros)”. The company did not specify which profit indicator this referred to.
It has previously forecast its half-year trading profit at £1.1 billion.
Monday’s shock announcements sent Tesco’s share price sliding almost 12 percent in early deals.
And the stock finished down 11.59 percent at 203 pence on London’s benchmark FTSE 100 index, which sank 0.94 percent to close at 6,773.63 points.
“We have uncovered a serious issue and have responded accordingly,” Tesco’s new chief executive Dave Lewis said in a statement issued by the company, which is the world’s third-biggest supermarket group after France’s Carrefour and global leader, US retailer Wal-Mart.
“The chairman and I have acted quickly to establish a comprehensive independent investigation,” said Lewis, who took the helm at the start of September in a bid to turnaround Tesco, which has now issued a third profit warning in just nine weeks.
“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.”
Lewis later told reporters that Tesco had “asked four people to step aside so we can be sure we do the fullest and frankest investigation”.
A spokesman confirmed that the four were “senior executives” at the group but refused to say if UK managing director Chris Bush was among the quartet despite Lewis announcing also that Robin Terrell had been appointed to lead the UK business.
– Earnings delayed –
Tesco said it would now publish its interim earnings on October 23, three weeks later than had been planned in the wake of the probe being carried out by accountancy firm Deloitte, which will work closely alongside Freshfields, the supermarket’s outside legal advisers.
The announcement is a fresh blow for Tesco, which in August issued profit warnings and slashed its shareholder dividend by 75 percent, blaming challenging trade and high investment costs.
“The new chief executive’s baptism of fire continues as Tesco adds a profit warning to a profit warning,” said Richard J Hunter, head of equities at Hargreaves Lansdown Stockbrokers.
“A combination of an overstatement of income and an understatement of costs has led to a material shortfall to the previously announced profit figure. Whilst this does not come close to jeopardising overall profitability, it follows last month’s announcement when the market had assumed that, at least, the bad news was out in the open and being dealt with.”
– Intense competition –
Tesco, which is facing intense competition in Britain from German-owned discount retailers, had announced in July that outsider and Unilever executive Lewis would replace Philip Clarke.
Lewis’ predecessor had shocked financial markets at the start of 2012 when he oversaw the supermarket’s first profits warning in 20 years.
That sparked a £1.0-billion turnaround plan to refresh its supermarket stores, but the group revealed in April that annual profits fell for the second year in a row.
Tesco has struggled in recent years in Britain, as recession-weary shoppers have turned to German-owned discount retail groups Aldi and Lidl.
Discount chains boomed during the downturn as consumers tightened their belts to save cash, and remain popular despite the economy’s steady recovery this year.
Tesco’s profits have been weighed down also by fierce competition from its traditional supermarket rivals comprising Wal-Mart division Asda, Sainsbury’s and Morrisons.
Tesco’s latest revelations dragged down the supermarket sector, with shares in Sainsbury’s falling 1.93 percent to close at 278.80 pence and Morrisons losing 1.65 percent to 179 pence.
Britain’s biggest retailer has also suffered abroad in recent times, causing it close its failed US division Fresh & Easy and to exit from Japan over the past couple of years.