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Tesco shares dive after executives are suspended in profit guidance investigation Tesco shares plunge as supermarket confirms investigation into inflated profits
(about 1 hour later)
Tesco suffered fresh humiliation today after a shock admission that it overstated its profits guidance by £250 million. Shares in Tesco plunged in early trading after the supermarket made a shocking admission that its profit forecast was inflated by £250 million as it vowed to hold a full investigation, including former boss Phil Clarke.
Shares in Britain's biggest grocery chain dived to their lowest level in 11 years as the revelation caused its third profits warning in as many months. Tesco also revealed four executives have been suspended while the investigation is carried out. New chief executive Dave Lewis, who has been in the job only since the start of month, said the board had asked law firm Freshfields and accountancy firm Deloitte to conduct an independent review into the accounting irregularities, and had referred the matter to the Financial Conduct Authority. PwC has been Tesco’s auditor since 1983.
In a media call earlier today, new chief executive Dave Lewis refused to discuss individual details amid reports UK managing director Chris Bush is among those suspended. The investigation will involve the questioning of past and present senior executives, including Clarke, who was ousted in July. Lewis said he was unable to say how deep the problems lay, adding: “It will be the fullest investigation possible, so we will talk to anyone with a point of view on the situation.”
The supermarket has asked Deloitte to undertake an "independent and comprehensive" review of the issues, which involved the accelerated recognition of commercial income and delayed accrual of costs. Deloitte will work alongside Freshfields, the group's external legal advisers. As Tesco shares — which have lost nearly 40 per cent in the past 12 months — plunged 20.55p to 209.07p, under-fire chairman Sir Richard Broadbent said he would remain in place and that any decision to resign would be in the hands of shareholders.
Shore Capital Stockbrokers analyst Clive Black said: "These are serious times for Tesco and its shareholders. We are flabbergasted by this development." “Things are always unnoticed until they are noticed,” he said. “I think the most important thing right now is to deal with the investigation in front of us.”
Meanwhile, chairman Richard Broadbent, who came under intense scrutiny this morning, insisted that he is listening to shareholders amid calls that he should resign, adding: "My intention is to continue to be part of the solution". The investigation relates to Tesco's latest profits warning at the end of August, when it said half-year trading profits would be in the region of £1.1 billion. He said he was looking at all options, including bringing new chief finance officer Alan Stewart in before his December start date — although Stewart’s current employer, M&S, is unlikely to let him leave early — and would investigate possible bonus clawbacks such as former chief finance officer Laurie McIlwee’s £1 million golden goodbye.
The company admits that the issues uncovered in its UK food business mean the figure is likely to have been overstated by £250 million, leaving profits down by around 46 per cent on the £1.58 billion a year earlier. Tesco has suspended four executives, which it refused to name, although it said UK managing director Chris Bush had been temporarily replaced by multi-channel director Robin Terrell.
Lewis, who started in the role earlier this month, said: "We have uncovered a serious issue and have responded accordingly." Lewis said issues were raised with him on Friday afternoon by a senior employee about the UK commercial division, which led to an internal investigation over the weekend, before it was decided an independent review should be conducted.
The errors emerged during the company's preparations for half-year results, which were set to be released on 1 October, but will now be announced on 23 October. Lewis explained: “The revenues due to us from suppliers … has been reported in the wrong time period.”
Lewis took over from Philip Clarke, whose departure from the retailer he joined 40 years ago was brought forward after the profits warning at the end of August. He added: “It’s about the recognition of the money received versus when the transaction took place.”
The previous profits guidance of £1.1 billion for the half-year to August 23 was already well below the City's forecasts, even before today's disclosure that profits had been overstated by around £250 million. He added that he had never seen anything like it during his 27 years at Unilever.
However, Freddie George, retail analyst at Cantor Fitzgerald, said he had warned Tesco last year of potential irregularities over its falling sales.