Tesco issues warning over profits

Profits around £600m short of expectation

Updated: 
Tesco Supermarket Report 92% Fall In Profits

Struggling supermarket giant Tesco capped a disastrous year today by warning that profits will be significantly short of expectations.

The company said trading profits for the year to February will not exceed £1.4 billion, compared with City forecasts for a figure of more than £2 billion.

New chief executive Dave Lewis said the latest warning reflected the impact of steps being taken to overhaul the group in the wake of an accounting scandal revealed in September.

A probe into the scandal - which involved rebates from suppliers being moved around to different periods on the company's balance sheet - found it had been going on for years and at least as far back as the 2012/13 period.

Stronger supplier relationships

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".

With sales falling at their steepest level in four decades, the UK's biggest supermarket chain has also been battling a fierce price war as discounters Aldi and Lidl continue to eat into its market share.

Mr Lewis, who will give more details on his plans for the group in a trading update on January 8, said the actions being taken were impacting short-term profitability but were essential to restore the health of the business.

He added: "We will not engage in short-term actions that compromise in any way our offer for customers."

It is the fourth time this year that Tesco has warned on profit, having achieved a trading profit of £3.3 billion in the previous financial year.

As the graph below shows, investors did not take the news well. Tesco shares opened 14% lower at 161p, wiping out a recovery since the end of October and leaving the stock at its lowest level in more than a decade.

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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."

Tesco's Stares Into Black Hole


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