Tesco Profits Plummet in H1, Chairman Resigning

24 Oct 2014 --- Tesco Chairman Sir Richard Broadbent has announced his plans to leave Tesco, and said he felt the need for a demonstration of accountability by the supermarket’s bosses. His decision came as the firm revealed its pre-tax profits had slumped 92 per cent on the year to £112m in the first six months of its financial year. Sales fell 4.4 per cent to £34bn, with the UK worst affected of all the global units – trading profits in Britain slumped 56 per cent to £499m.

By contrast, Asian trading profits slid only by 9.2 per cent to £260m, and European profits soared by 41.8 per cent to £76m.

Tesco reported that UK like-for-like sales down (4.6)%, impacted by strong competition across the grocery market, headwinds from price cuts and fewer untargeted promotions. The £0.9bn Group trading profit – year-on-year decline reflects challenges of UK business. Total UK online sales were up 11%; like-for-like sales growth of +0.8% in UK convenience stores

The Deloitte investigation into overstatement of expected half year profit concluded; impact confirmed as £(263)m, of which £(118)m relates to first half trading profit, with the balance treated as a one-off item (being c.£(70)m relating to 13/14 and c.£(75)m to pre-13/14).

Sir Richard Broadbent, Chairman: “The issues that have come to light over recent weeks are a matter of profound regret. We have acted quickly to clarify the financial performance of the company. A new management team is in place to address the root causes of the mis-statement and to develop and implement the actions that will build the company’s future. I am confident that the new Chief Executive and Chief Financial Officer will move rapidly and effectively in this respect.”

“Once this transition is complete and business plans are in place, it will mark the beginning of a new phase for the company and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time. My decision reflects the important principle of accountability on behalf of the Board and will support the company to draw a line under the past as it enters the next phase of its development.”

Dave Lewis, Chief Executive: “Our business is operating in challenging times. Trading conditions are tough and our underlying profitability is under pressure. We do however face these challenges from a position of market strength and I have been heartened by the team’s welcome and their determination to stay focused on doing the very best for our customers.  Whilst my review of the whole business continues, three immediate priorities are clear: to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand.”

Deloitte, in their review of our conclusions, has confirmed that:
?our overall commercial income adjustment in the current reporting period of £263m is reasonable;
?amounts have been pulled forward or deferred, contrary to Tesco Group accounting policies;
?there have been similar practices in prior reporting periods;
?the current and prior practices appear to be linked as income pulled forward grew period by period.

Group sales, including VAT, fell by (4.4)% to £34.0bn. At constant exchange rates, sales declined by (2.0)% including petrol and by (1.9)% excluding petrol.

Group trading profit was £937m, down (41.0)% on last year, impacted by a weakening UK grocery market, the investments we are making in our customer offer and challenging trading conditions overseas. Group trading margin was 3.04%, down (189) basis points year-on-year.

Profit from joint ventures and associates reduced by (41)%, primarily reflecting lower profits from our UK property joint ventures, in addition to small initial trading and integration losses from our newly formed partnerships with China Resources Enterprise Ltd (CRE) and Trent Limited, part of the Tata Group.

Net finance costs increased to £(171)m from £(151)m last year due to early refinancing of maturing debt, in addition to a fall in capitalised interest, driven by a reduction in the level of work-in-progress from last year.

Underlying profit before tax therefore declined by (46.6)% to £783m.

Group profit before tax was £112m, after one-off items totalling £(527)m, including an adjustment relating to prior years’ commercial income of £(145)m, stock write-downs of £(63)m, impairment charges of £(136)m in the UK and Europe, restructuring costs of £(41)m, a £(41)m retrospective charge relating to a Valuation Office ruling on ATM rates and a £(27)m increase in the Bank’s provision for customer redress.

Profits arising on property-related items. In April 2013 we announced that we would be accelerating the scaling back of our sale and leaseback programme. In the first half, profits arising on property-related items were minimal as a reduced sale and leaseback programme was offset by losses on disposal and property-related costs across the Group.

Total Group tax has been charged at an effective rate (on profit before tax prior to the one-off items mentioned above) of 20.2% and we expect the effective rate for the full year to be broadly in line with the rate for the half year. Last year’s rate of 18.0% incorporated the one-off effect of a lower UK tax rate on deferred tax liabilities.

Underlying diluted earnings per share in the first half were 7.71p, (48.2)% lower year-on-year at actual tax rates, due to the reduction in underlying profitability and a more normal rate of Group tax.