Tesco in £500m profits warning
Shares plunge as retail giant loses market share
RETAIL: Britain’s largest retailer Tesco has issued a £500m profits warning as shoppers decamp to cheaper rivals Aldi and Lidl.
The supermarket giant’s present boss, Dave Lewis, said price cuts and a shake-up of the supply chain following a £263m accounting black hole will pare annual profits back to £1.4bn.
MORE THAN £1bn was wiped off Tesco’s value yesterday after the beleaguered retail giant issued its fourth profits warning this year and analysts predicted the group will make a loss in its second half.
The UK’s biggest retailer has suffered a dramatic loss in market share as discounters Aldi and Lidl eat away at its market leading position and shoppers decamp to other stores.
Shares in the group, which is the world’s third biggest retailer, fell 6.6 per cent to 174.9p giving the group a market capitalisation of £14.207bn, down from £15.214bn at Monday’s close.
Tesco cut its full-year trading profit forecast by nearly a third and analysts at Espirito Santo warned that the group is at imminent risk of being rated as “junk status” by credit agencies.
Tesco has struggled to cope with the rise of the discounters and has been criticised for yo-yo pricing – putting prices up in order to cut them to offer shoppers “bargains”.
The group has also been hit by its over-dependency on huge outof-town sites when customers are switching away from the weekly shop to regular top-up shops at convenience stores, backed up by bulk buying online.
Chief executive Dave Lewis, who joined in September on a rescue mission, said the lower guidance reflects new accounting policies and procedures following the recent £263m accounting scandal and investment in stores, staff and lower prices.
“The combination of all those things gets you to an investment which is a little bit north of £500m,” said Mr Lewis.
Tesco said it expects group trading profit for its 2014-15 year to be lower than £1.4bn, down more than £500m on analysts’ average forecasts of £1.94bn.
Analyst Darren Shirley at Shore Capital said: “What is clear is Mr Lewis is willing to take on considerable profit pain to reposition Tesco.
“The implication of today’s update is that it is clear that Tesco’s new management team is willing to take a period of significantly lower profitability, and even loss- es in the UK, to move Tesco to a more sustainable footing.
“We expect the profits warning, and the implication for 2016 and beyond, to further heighten speculation around the need for disposal activity and the potential
We believe Tesco still needs to cut prices by at least five to 10 per cent Analyst Rickin Thakrar at Espirito Santo on prospects for Tesco
for a rescue rights issue to shore up Tesco’s balance sheet.“
Analyst Rickin Thakrar at Espirito Santo said: “While we expect Tesco to cut capital expenditure to maintenance and forego dividends for the next two years, we believe Tesco still needs to cut prices by at least five to 10 per cent and improve the quality of its produce alongside convincing consumers and investors that an out-of-town, large, uncompetitive shop at an expensive bespoke site is still relevant.
“We now think Tesco could start earning consistent losses in the UK versus our previous view of zero profits.”
After slashing its first-half dividend by 75 per cent, shareholders said they are not expecting much for the year end.
“Given what you’ve seen today it wouldn’t be surprising if the final was nil,” said one large Tesco investor.
However major investor Schroders said uncertainty and panic can create “exceptional opportunities for long-term value investors”.