Tesco has revealed that its expected half-year profit has been overstated by £250m and has launched an investigation. The City has reaced with shock.

“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 lopsided 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, nder 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. Clive Black, Shore Capital


“Tesco also states that someof the £250m difference is a matter of intra-year timing – in other words an element of the £250m trading profit shortfall is more properly allocated to half-two and will therefore not affect the full-year outcome.

“However, although details are lacking, it seems that this is not the explanation for the full £250m – so there is a clear implication that Tesco’s previous full-year trading profit guidance of £2.4bn to 2.5bn needs to be reduced.

“Tesco makes no comment about the level of adjustment that might be needed to full-year guidance so we cannot necessarily assume that the maximum change required is £250m.

“Tesco comments that this issue was uncovered in relation to the UK food business – it is trying to establish whether these problems have an impact beyond the core division. It does not mention any reason to be concerned but - as mentioned earlier - this situation has only just come to light so it would be wise not to rule anything out. James Anstead, Barclays


“In November 2013, in a morning comment titled A desperate move? and in October 2013 we published a research note entitled “It’s just an illusion”. In both we questioned how Tesco was supporting 5.2% UK trading margins with falling sales and rising costs.

“We believed Tesco had been overstating its UK commercial gross profit by £200m+ per annum, via deducting monies from suppliers’ trading accounts or extending payment dates without notice. Below is a copy of part of that update.

“How can Tesco make up for the £500m lower UK incremental sales in cost cutting when costs are rising? Logically it is not possible to say UK margins are on track, in our view. Surely we should be expecting a £100m+ UK profit downgrade. The answer is Tesco is again demanding/taking money from suppliers trading accounts.” Mike Dennis, Cantor Fitzgerald


“The issues are due to “accelerated recognition of commercial income and delayed accrual of costs”. This is effectively timing issues, bringing income forward from future periods and delaying costs to those future periods.

“One example in which this could happen is ‘Tesco commercial director of department X is short his profit target; he/she discusses with supplier bringing forward a big promotion, funded by supplier; in return Tesco commits to doing three more new product launches in the
next reporting period.’

“If this is the kind of manipulation that happens, then Dave Lewis as a past supplier may have had good prior insight into it.

“This is the stretching of the accounts we have referred to before. Eventually these would have to catch up with them, but the poor trading results will have made it harder to hide these issues.” Bruno Monteyen, Bernstein


“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.

“Although the errors did not occur on his watch, this is not a very auspicious start to Dave Lewis’ tenure. It is now more imperative than ever that Tesco outline a very clear and compelling strategy as to how it intends to put is UK business back on track.” Neil Saunders, Conlumino