City shocked as Tesco issues profit warning

Tesco said the cost of turnaround policies 'will not exceed 1.4 billion'. Picture: Reuters

In its fourth such alert this year, the company said the cost of turnaround policies brought in to help halt the slide in market share meant trading profit for the financial year “will not exceed £1.4 billion”.

Richard Hunter, head of equities at Hargreaves Lansdown, said the new guidance was nearly 30 per cent shy of an already lowered estimate, and Tesco’s shares fell 6.6 per cent, or 12.4p, to end the session at 174.9p.

Hunter added: “The company partially attributed the lower figure to increased investment in the business, but amidst the accounting mishap, the revolving door in the boardroom and an unforgiving attack from the discount retailers, investors have simply lost interest in waiting for a recovery story which still seems some way off.”

Tesco has invested in its service by hiring an extra 6,000 staff for its stores, increasing product availability on key lines and cutting prices, and said that early feedback from customers was “encouraging”.

Chief executive Dave Lewis admitted the firm had got itself into a difficult financial position. But he added: “I can see very, very clearly a way out of that.”

Tesco’s head office had gone through a turbulent period after a raft of executives – including UK managing director Chris Bush – had left, and Lewis hinted there could be more blood on the carpet. He said: “I’ve had to make some very, very, very tough calls and there will be more tough calls ahead of me.”

He accepted the impact of his shake-up on the share price but said the changes would create “medium- to long-term shareholder value”.

Lewis said he had decided against using “levers” that could be pulled to beef up full-year profits but would hit the customer offer – such as cutting back on staff after Christmas even though stores will see 25-30 per cent less activity.

He has temporarily taken charge of the supermarket’s UK operations and indicated he will recruit a permanent holder of the role in the next few months.

Nicla Di Palma, an analyst at Brewin Dolphin, noted the profits warning was not related to a deterioration in sales but said the update implies “basically zero UK trading margin” and noted that management did not exclude further price cuts. She also expressed disappointment that further hits are on the cards after the £263 million Tesco was forced to write off its profits this year due to accounting issues.

“We expect the final dividend to be cancelled and wait to hear more information about how Mr Lewis plans to improve Tesco,” she said. “We also hope management will be able to sell some of its non-core assets and will be brave enough to close underperforming stores.”

Mike van Dulken, head of research at Accendo Markets, said while Lewis may be taking the right steps to restore confidence in the UK’s biggest grocer and keep cut-price rivals at bay, the short-term impacts on profitability “are being punished mercilessly”. “Could this be where the real bargaining hunting begins, or is there too much risk still in the basket?” he asked.

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