Tesco's profit down 92 % as scandal continues

Accounting scandal much larger than expected

A month ago, Tesco announced that the previous 6-month profit forecast was 320 million euro too high because of an accounting error. Deloitte research now revealed that the accounting manipulation had been going on for quite a while. 

In the first half of Tesco’s fiscal year, 118 million pounds of fictional profit had been created and the year before, 70 million pounds of fictional profit had been written into the books. Deloitte found similar errors in the years before that, leading up to 75 million pounds. In total, some 263 million pounds (335 million euro) was portrayed erroneously as profit.

The worrisome fact is that this has been going on for quite some time and that the consistent manipulation of numbers had not been found up until now. It took a whistleblower to uncover the truth, and even his warnings went unheeded during the reign of CEO Philip Clarke. As soon as Dave Lewis took charge of Tesco, the truth came out and the company now has to deal with a huge accounting scandal.

President Broadbent resigns

Tesco’s president Sir Richard Broadbent now feels the need to resign, although he won’t leave immediately. As soon as Dave Lewis has uncovered every problem and has come up with a future-proof business plan, Broadbent will step aside.

This leaves Lewis pretty much isolated at the top of his company. Obviously, he has no need for contaminated directors and he has to wipe the slate clean, but he lacks managerial retail experience. The former supplier is now a retail CEO in a period of crisis, in desparate need of experienced assistance.
 

CEO Dave Lewis’s three priorities

To make matters worse for Tesco, there is now a culture of fear because of the thorough research into the scandal. Lewis has apparently asked his staff not to delete any correspondence or to shred paperwork from the past. Nevertheless, Lewis is taking matters into his own hands and has listed three priorities: recover its British competitive position, protect and improve Tesco’s results and start the long road back to transparancy and trust in Tesco’s brand.

Plenty of challenges for the new CEO, who will have to start over after this false start. British customers have ignored the market leader in huge droves, which can be seen in the 4.6 % like-for-like turnover drop over the first 6 months – and even worse: the group’s EBITDA dropped 92 % to 112 million pounds (142 million euro).

The profit drop can partially be explained because of the updated profit forecast, as Tesco wrote off a 527 million pounds (670 million euro) sunk cost, but even without this correction, Tesco’s first half profit is still 46.6 % lower than in its previous fiscal year.

Not only its British operations have suffered: Asian and European turnovers have dropped, while operating profit has also dropped in Asia. European operating profit has grown, not because it has managed to cut costs but because of lower depreciations.

Tesco’s online turnover grew 11 % in Great Britain, while its like-for-like turnover in British Tesco Express stores dropped 0.8 %. This can still be considered growth, but compared to the average 5.2 % growth for this store formula (according to IGD), it is paltry.

These numbers are Tesco’s start of a very long road toward recovery, like its CEO Dave Lewis has said. Will he given that time, seeing how investors usually have knee-jerk reactions to bad news concerning public British enterprises? The last thing Tesco needs is the dismissal of a CEO after a bad start…