Tesco has announced a 92% profits plunge and warned of more pain to come after the discovery of a worse-than-expected £263 million hole in its accounts.
Britain’s biggest supermarket also revealed sales – already falling at their steepest level in four decades – had deteriorated even further.
Pre-tax profits for the six months to August 23 fell to £112 million from £1.39 billion in the same period last year, hit by the weak sales performance plus a series of one-off charges including the effect of the accounting scandal revealed last month.
Shares tumbled by as much as 9%, wiping more than £1 billion off the group’s value, as Tesco warned the effects of the blunder were worse than the £250 million pencilled in when it was revealed last month and more costs could result.
A probe into the scandal – which involved rebates from suppliers being moved around to different periods on the company’s balance sheet – found that it had been going on for years and at least as far back as the 2012/13 period.
Tesco has asked eight executives to step aside in the wake of the probe while chairman Sir Richard Broadbent today said he would step down to show that someone was “carrying the can” for the errors – which were “a matter of profound regret”.
New chief executive Dave Lewis tried to draw a line under the episode as he pledged to restore the company’s competitive edge and again make it “the best supermarket for customers” amid a full-scale review of the business.
But Tesco has now had to re-write its rules on dealing with suppliers in light of the mistakes and said this would have an impact on its second-half performance.
It is also facing an investigation by the Financial Conduct Authority (FCA) which it warned could result in “significant” fines.
Meanwhile the business has frozen pay-offs of £1.14 million due to be paid next year to departed chief executive Philip Clarke and £970,000 for former finance director Laurie McIlwee.
Mr Clarke is still being paid his full salary of £95,000 a month to assist with the transition after Mr Lewis took over in September but the new chief executive said they were “not in contact given the investigation”.
Tesco revealed that a probe by accountants Deloitte with law firm Freshfields into the accounting scandal had involved more than six million documents with 18,000 invoices reviewed and 700 scrutinised in detail.
It found a £118 million trading profit shortfall related to the latest half-year plus a £70 million hit for the previous financial year and £75 million for 2012/13.
Once started the problem seems to have spiralled out of control, as Tesco said “current and prior practices appear to be linked as income pulled forward grew period by period”.
But Mr Lewis brushed off any suggestion of fraud saying that no one had gained financially from the mistake.
Meanwhile, Tesco’s like-for-like sales performance for the second quarter fell by 5.4%, worse than the 3.7% in the first quarter giving a 4.6% fall for the half.
Mr Lewis acknowledged the tough trading environment with supermarkets engaged in a bitter price war as they face a squeeze from discounters Aldi and Lidl.
But he declined to set out any big plans on price cuts, saying he was focused on service levels and product availability first.
Mr Lewis said Tesco had lost touch with the “core DNA of the brand” which was at its best when being a “champion for the customer”.
“There is an opportunity for us to reinvigorate, to go back to what it was that made this brand great,” he said.
He plans to ramp up service levels in stores with two million more staff hours before Christmas, and to focus on making sure the grocer’s top 1,000 product lines were always available to customers.
Mr Lewis’s comments suggested jobs in Tesco’s stores would grow but prospects for corporate staff at its headquarters and elsewhere looked uncertain as he highlighted the fact that it has 32 offices around the country.
The new boss revealed he was pressing ahead with plans to get rid of five private jets, with two likely to be sold in the coming weeks – and would not be using them when he travels abroad in the coming weeks to run the rule over Tesco’s overseas stores.
Outposts in Asia and central Europe look likely to come into focus as potential sell-offs, along with UK download business Blinkbox and other group brands, as the new boss looks at how “the different parts of the group fit into the strategy”.
He played down speculation that funding for Tesco’s strategy could come from a rights issue saying none was currently being planned at the moment and, though it could not be ruled out, he would look at disposals and savings elsewhere first.
Mr Lewis said: “I don’t think the business is in a big hole. I am really very hopeful that we can get Tesco back to the force that it has been.”
He said his priorities would be to recover competitiveness in the UK, shore up the balance sheet and rebuild “trust and transparency” in the wake of the profits scandal.
Analyst Louise Cooper was sceptical about the plans by Mr Lewis, a former Unilever executive with a background in marketing, to focus on reasserting the Tesco brand and improving service rather than looking at price cuts.
She said: “Is that what Tesco really needs? Are customers moving in their droves to Lidl and Aldi for their service or their prices?
“Dave Lewis’s partly disclosed plan does not look that much different than the plan of the previous CEO: service, some pricing and Tesco core values. Dave Lewis just uses more Unilever impressive words.”