Analysts offer their thoughts on Tescos profit overstatement

Analysts offer their thoughts on Tesco's profit overstatement

Tesco today (22 September) revealed a GBP250m (U$408.1m) profit overstatement in its first-half accounts, pushing shares down nearly 8% in early trading. The "serious issue" has resulted in the reported suspension of four senior executives. Tesco has now launched an independent review. Analysts offer their thoughts on the news.

Neil Saunders, managing director of Conlumino:
"Today’s announcement will further undermine market confidence in a company that has already lost a lot of investor goodwill. Mistakes do happen, but this gives the impression of a company that is not in full control of its internal procedures. It is just not what you expect from a company as large as Tesco.

"More significantly, it means that performance - which is already extremely weak - is actually much weaker than anticipated. This is something that will alarm investors and means that Tesco has much further to travel to recovery than first thought."

Mike Dennis, Cantor Fitzgerald analyst:
"We suspect Dave Lewis was aware of Tesco’s actions while at Unilever and from comments across the UK/global supplier base so we expect he already had several questions for Tesco’s commercial team when he joined.  

"We now expect H1/15E group trading profit to be GBP800m (previously around GBP1.1bn due on 1st October) and the interims will be reported later on 23 October. This implies the UK Tesco H1 trading profit could be down 55% to GBP500m on sales ex. vat and inc. petrol of GBP21.0bn, down 2.7%. This gives a UK trading margin of 2.3% down 280bps year-on-year. Tesco has already indicated a major reduction in the interim dividend by 75% and could now do the same for the final dividend implying the annual GBP1.19bn dividend is potentially cut by GBP890m and another cut in capex. The read across is that Tesco may now have to sell assets across its UK and international portfolio to pay for this behaviour."

Clive Black, director and head of research at Shore Capital:
"Tesco has stunned the market today with its announcement. Such an announcement is not the stuff of a well operated FTSE-100 organisation, As a result of the identification of the issue, to which we do not yet know the full extent, cause, timing and outcomes, management has brought in external advice.

"Clearly there can be no suggestion of impropriety on behalf of the new CEO to our minds, who has been in the job less than a month. However, this development may raise, indeed must raise, much more fundamental questions over the chairman's position and the nature, composition and extent of the board, which to our minds has been lop-sided between executives and non-executive directors for far too long; such matters, of course, are for shareholders to decide.

"These are serious times for Tesco and its shareholders. We are flabbergasted by this development and have no choice but to put our Hold stance, which we only went up to through Mr Lewis' appointment, Under Review. We expect the market to respond in a penal manner on the Tesco’s shares upon opening, we’ll monitor with interest how the dust settles."

Bernstein Research analysts:
"We have written in the past about how the board of Tesco was decimated under Philip Clarke, with all the executive directors bar Philip himself leaving, resulting in a board with limited retail experience and executive oversight. This has now come back to haunt Tesco. There has clearly not been sufficient oversight and the accounts have become overly stretched. This has all happened under the watch of Sir Richard Broadbent, we suspect he may be under pressure as a result."

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers:
“A combination of an overstatement of income and an understatement of costs has led to a material shortfall to the previously announced profit figure. Whilst this does not come close to jeopardising overall profitability, it follows last month’s announcement when the market had assumed that, at least, the bad news was out in the open and being dealt with.

"Prior to today’s precipitous drop, the shares had fallen 39% over the last year, and 21% in the last three months alone. The market consensus of the shares as a sell will no doubt be consolidated following this announcement.”