Tesco issues yet another profit warning

Trading profit for the financial year ending February 2015 will not exceed £1.4bn, it said in a statement released to the City today (December 9). That compares with market expectations of between£1.8bn–£3.2bn.

Tesco ceo Dave Lewis said the retailer would continue to focus on its customers. “This means running our business in a way that everything we do creates sustainable value,”​ said Lewis.

‘Not engage in short-term actions’​

“Whilst the steps we are taking to achieve this are impacting short-term profitability, they are essential to restoring the health of our business.  We will not engage in short-term actions that compromise in any way our offer for customers.”​

Much remained to be done to revive the retailer’s fortunes but good progress was being made, Lewis claimed. “Our priorities remain restoring competitiveness in the UK, protecting and strengthening the balance sheet and rebuilding.”​

In recent weeks the retailer had implemented “new policies and procedures”​ to  improve the business. “Our new commercial approach will underpin stronger long-term relationships with our suppliers, benefiting customers, whilst at the same time ensuring that revenue recognition is transparent and appropriate,”​ said Lewis.

He added that Tesco had invested further in service, with the appointment of more than 6,000 new staff in store, while increasing product availability on key lines and investing in price.

Market analyst Conlumino said today’s warning came as no surprise. Conlumino md Neil Saunders said: “It does underscore the scale of the problems the grocer is still facing as it tries to adjust to the new trading environment.​

‘A necessary evil’​

“Tesco needs to invest in both pricing and improving the shopping experience for consumers. When such investment is made against a backdrop of falling sales it will inevitably impact profitability. However, such a move is a necessarily evil; the price of failing to accept a reduction in profit would simply be the continued deterioration of the business.”​

The key question was whether or not the measures Tesco was taking​ will allow the retailer to boost  its market share once more, said Saunders. While that was possible the outcome is my no means guaranteed. “The competitive environment in grocery is so intense that it is not possible for all players to grow,”​ he warned.

“There is now a sense that expectations around margins and profits in grocery need to be reset. Tesco’s announcement today is part of managing that expectation. It remains a profitable and successful business but in our view the days of easy growth and easy profit are now firmly over.”​

Begbies Traynor partner Julie Palmer said: “Another day, another profit warning from Tesco. Just as it has been cutting prices in a bid to compete in the ongoing supermarkets price war, the UK’s largest food retailer today surprised the market by slashing its profit forecasts for the full year by nearly £500M compared with analyst expectations.”​

‘Surprised the market’​

Today’s profit warning implies more serious woes for the retailer, as it struggles to maintain its leading market share, with UK grocery trading losses expected in the second half of the year, said Palmer.

“For some time, UK consumers have been voting with their feet, preferring the combination of value and quality provided by Tesco’s smaller peers, and with today’s negative share price reaction, it seems investors too are heading for the checkout.” ​

The latest profit warning follows an earlier advice note in August when the group axed its profit prediction from £2.8bn to £2.4bn.

Tesco has found its market share under pressure from both discount stores Aldi and Lidl and posh retailers Marks & Spencer and Waitrose.

Meanwhile, the Serious Fraud Office is continuing to investigate accounting irregularities​, which led the retailer to overstate its first-half profits by £263M. Tesco subsequently suspended eight executives.

Tesco will post its full-year results on January 8 2015.