Tesco issues another profit warning

Plummet after “creative accounting”

Compared to its full fiscal year 2013/14, which ended in February 2014, the drop in profitability is worrisome: it reported a 3.3 billion pound (4.2 billion euro) company profit back then, even though it has been going through an accounting scandal since September.

Last year’s numbers were actually the result of ‘creative accounting’: Tesco had created more than 70 million pounds of non-existing profit in its previous fiscal year. In the first part of the current fiscal year, it added another 118 million pounds of non-existing profit, which has cost seven senior managers their job and has forced Tesco to go through some rough weather.

Better safe than sorry

It is surprising to see Tesco lower its profit forecast, even after the numbers were taken into account and it had already lowered its profit forecast on 23 October. 

It is betting safe and has decided to accept a correction, in order to avoid slipping up again when it reveals its 2014/2015 numbers. Chairman of the board, Dave Lewis, explains the lower profit forecast is part of investments in the “Tesco of the future”.

Invest in lower prices and better service

“Tesco is focused, and will continue to focus, on doing the right thing for customers. This means running our business in a way that everything we do creates sustainable value. Whilst the steps we are taking to achieve this are impacting short-term profitability, they are essential to restoring the health of our business”, Dave Lewis said.

Tesco has tightened its bonds with suppliers, which will have received a boost when Matt Simister returned to his position as head of Group Food Sourcing. It has also invested in better product availability, lower consumer prices and better customer service by hiring another 6,000 employees.

£1.4 billion profit (or maybe even less)…

On 8 January 2015, CEO Dave Lewis will present his plans to improve Tesco’s position structurally and by then, it will have become clear how the company has fared in the all-important Christmas holiday period. “Our priorities remain restoring competitiveness in the UK, protecting and strengthening the balance sheet and rebuilding trust and transparency”, Lewis said.

In any case, Tesco has lowered expectations once more with the forecast of a 1.4 billion pound operational profit. When looking at the statement literally, the company says trading profit “will not exceed 1.4 billion pounds“, which means it could even be lower. If that were the case, much lower than 1.4 billion pounds could prove detrimental (again).