Tesco Shares Slide on News That 1t 0verstated Profit Guidance

A Tesco store in Bow, in east London. By STANLEY REED September 22, 2014

LONDON — Shares of Tesco, the large British grocery retailer, fell sharply on Monday after the company disclosed that it had overstated its expected half-year profit and suspended four senior executives.

The company also said on a call with analysts that it had put its e-commerce head, Robin Terrell, in charge of British operations while outside auditors investigated its accounts. Mr. Terrell, a former Amazon executive, was appointed to a role that had been held by Chris Bush.

Tesco, which did not identify the executives it suspended, declined to comment on Mr. Bush's status with the company.

"We have uncovered a serious issue and have responded accordingly," Dave Lewis, chief executive of Tesco, said in a statement on Monday. "We will take decisive action as the results of the investigation become clear."

Mr. Lewis told reporters on Monday that he had become aware of the accounting problem on Friday when "an informed employee" brought it to Tesco's general counsel's attention. Mr. Lewis suggested that the issue involved incorrect reporting of the timing of payments to Tesco from suppliers for things like product promotions. He said he would give an update on the investigation on Oct. 23, when the company is scheduled to report financial results.

The news of an accounting irregularity will add to the struggles of Tesco, which has been battered by earnings downgrades and what appears to be leadership turmoil. Once a dominant food retailer in Britain, the company has lost ground to discounters like Aldi and Lidl, which are both based in Germany.

Analysts say that while some products in Tesco do have low prices, many of the company's roughly 3,300 stores in Britain are too large and hard for customers to navigate.

"It is difficult to find value in Tesco stores," said Neil Saunders, an analyst at the London retail consultants Conlumino. "They are very complicated and difficult to shop. It is not what people want these days."

Tesco is also losing at the higher end, Mr. Saunders said, to stores like Waitrose and Marks & Spencer, because customers perceive those competitors as offering better service.

Mr. Saunders says Tesco needs to streamline its stores and make more low-price products available and visible to customers. Tesco "could be put back on the proper footing, " he said. "But it will take time."

Tesco said it now believed the guidance it had given markets last month for the six-month period through Aug. 23 was overstated by an estimated 250 million pounds, or about $400 million. The misstatement occurred in the company's core British food business.

The supermarket chain said it had brought in the accounting firm Deloitte to conduct a review alongside Freshfields, Tesco's legal advisers. PricewaterhouseCoopers, the accounting firm, is the company's regular auditor. Richard Broadbent, Tesco's chairman, told reporters that the auditors, along with the board, had been caught unaware of the irregularities. A spokeswoman for PricewaterhouseCoopers said the firm could not comment on "client matters."

Mr. Lewis, a former Unilever executive, took the helm of Tesco at the beginning of this month. He was originally supposed to begin on Oct. 1 but his predecessor, Philip Clarke, whose departure was announced after a profit warning in July, left earlier than expected.

Tesco's share price, which was down nearly 12 percent in late trading Monday in London, has fallen more than 40 percent over the past year.

Pradeep Pratti, an analyst at Citigroup in London, estimated that the disclosure of the inflated earnings guidance meant that 25 percent was likely to be trimmed from the £1.1 billion profit estimate that the company had provided earlier for the six-month period through August.

For its fiscal year ending in February 2015, the company's results will most likely be 10 percent lower than the roughly £2.4 billion estimated in August, Mr. Pratti said in a note sent to clients.

Last year, the company earned £3.3 billion on revenue of £71 billion.

About two-thirds of the profit came from Britain. A foray into the convenience store market in the United States ended last year when Tesco sold most of its Fresh & Easy business to the Yucaipa Companies after previously announcing a £1.2 billion write-down on the business.

The figures that are now known to have been inflated were still a profit warning at the time they were released. "The business continues to face a number of uncertainties, including market conditions," the company said at the time.

source : http://rss.nytimes.com/c/34625/f/640316/s/3eb56328/sc/24/l/0L0Snytimes0N0C20A140C0A90C230Cbusiness0Cinternational0Ctesco0Eshares0Eslide0Eon0Enews0Ethat0Eit0Eoverstated0Eprofit0Eguidance0Bhtml0Dpartner0Frss0Gemc0Frss/story01.htm