Tesco chairman steps down as group confirms it actually overestimated its half year profits by £263m

23rd October 2014

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Shares in troubled supermarket giant Tesco have fallen sharply in early morning trading as the embattled retailer confirmed that it actually overestimated its half year-profits by £263m – £13m more than what it originally anticipated.

In its latest interim trading statement published today, it said that in the six months to 23 August UK like-for-like sales over the period dropped 4.6%, driven chiefly by strong competition across the grocery market. Pre-tax profit collapsed to £112m, down more than 90% on the near £1.4bn achieved over the same period last year.

On the back of the firm’s latest market update by 8.52am, Tesco stock had fallen by 5% or 9.8p to 173.2p.

Last month it came to light that Tesco had wildly overestimated its half-year profits by some £250m.

The group, which has since suspended a number of senior executives, launched an internal investigation into the matter, and accountancy group Deloitte was brought in to conduct an independent review. Deloitte concluded that Tesco’s profits were overstated by £118m in the first half of this trading year, by a further £70m in the 2013-2014 financial year and by £75m prior to that. City watchdog, the Financial Conduct Authority is presently conducting its own review.

Today Tesco chairman Sir Richard Broadbent has announced he is to step down. He said: “The issues that have come to light over recent weeks are a matter of profound regret. We have acted quickly to clarify the financial performance of the company. A new management team is in place to address the root causes of the mis-statement and to develop and implement the actions that will build the company’s future. I am confident that the new chief executive and chief financial officer will move rapidly and effectively in this respect.”

The UK’s main supermarkets have been enduring a hugely challenging period recently primarily as a result of much stiffer competition from the so-called hard-discounters such as Lidl and Aldi. July saw Tesco’s former chief executive Philip Clarke step down after the company issued a profits warning.

Just last week Berkshire Hathaway the investment company owned by renowned investor Warren Buffett offloaded more than 245 million shares in Tesco. Buffett had previously increased his stake in the supermarket following a profit warning but earlier this month Buffett told CNBC that he made a mistake in investing in Tesco. “That was a huge mistake by me,” he said.

Commenting on the latest set of results Tesco chief executive Dave Lewis said: “Our business is operating in challenging times. Trading conditions are tough and our underlying profitability is under pressure. We do however face these challenges from a position of market strength and I have been heartened by the team’s welcome and their determination to stay focused on doing the very best for our customers.

“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.”

Despite Tesco’s woes, Graham Spooner, investment research analyst at The Share Centre, recommends investors ‘hold’ the shares.

He says: “Fierce price competition and promotions are likely to remain a squeeze on margins for some time and in light of the absence of an articulated strategy we recommend a ‘hold’ for investors who believe the new management can turn things around. However, we believe new investors should stay on the side lines for now.”

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