Tesco Investors Voice Anger as U.K. Grocer Overstates Profit

Tesco Plc’s overstatement of its first-half profit estimate sparked anger among investors in the U.K.’s largest grocer, with one calling for heads to roll amid “crass incompetence.”

“Investors need to see managers publicly held to account for this, meaning fired,” said David Fergusson, chief investment officer of Singapore-based Woodside Holdings Investment Management Pte. Fergusson, who wouldn’t disclose the size of the fund he manages, is “exasperated” with the company.

Tesco suspended four executives while an independent probe into the accounts is being carried out, its newly installed Chief Executive Officer Dave Lewis said today. The shares plunged 12 percent to their lowest in more than a decade after the discovery of the overstatement led Tesco to cut its profit outlook for the third time in about two months. The retailer will take “decisive action as the results of the investigation become clear,” Lewis said.

The news is “a real shocker,” said Richard Marwood, who helps oversee $700 billion in assets at Axa Investment Managers in London. “These kind of accounting issues always shake investor confidence, but they are usually the kind of thing that occur in the smaller end of the market, not the FTSE 100.”

Dividend Cut

Investors are complaining after the company last month cut its interim dividend by 75 percent. The stock is set for a fifth annual decline as Tesco continues to lose share to discounters Aldi and Lidl. Investors including Fergusson are seeking remedies including the revocation of a termination package awarded to Chief Financial Officer Emeritus Laurie McIlwee, who agreed to step down in April, though is not due to leave the Cheshunt, England-based company until Oct. 3.

Chairman Richard Broadbent sidestepped questions over his future on a conference call today, saying “right now I will continue dealing with the issues as they arise.”

Tesco shares closed down 26.6 pence at 203 pence in London, their lowest closing price since May 23, 2003. The stock has tumbled 39 percent this year.

If Lewis “wants to be a good turnaround CEO, he needs to take a flamethrower at Tesco and this is just the latest example of why this is necessary,” Fergusson said. “We need to see immediate results from the new CEO or we will need to seek a buyer to take the assets off our hands.”

Lewis, a former Unilever executive, is tasked with reviving Tesco’s fortunes after three years under Clarke in which the grocer’s market value almost halved to about 17 billion pounds ($28 billion) amid sliding sales in the U.K. More than half of British households now shop at Aldi and Lidl.

‘Deepest Investigation’

Tesco said today that some income from suppliers to its U.K. food business was booked before being earned and costs were recognized later than incurred. The result was that its 1.1 billion-pound projection for first-half operating profit was about 250 million pounds too high.

Lewis said he will “do the fullest and deepest investigation” into what happened. Robin Terrell, head of multichannel at the retailer, will take over the running of the U.K. business, the CEO said, a position held since early-2012 by Chris Bush. Bush, a 32-year Tesco veteran, is among those to have been suspended, said a person familiar with the matter.

Fitch Ratings said in a statement today that Tesco’s BBB credit rating, the second-lowest investment grade, is subject to review for possible downgrade.

“Today’s announcement also confirms risks around the group’s governance,” Fitch said.

The full extent of the profit overstatement isn’t yet clear, Dave McCarthy, an analyst at HSBC Securities, said in a note today, raising the possibility that Tesco may need to seek funding from a “rescue” rights offering of new shares.

Today’s setback “could hold back investors’ enthusiasm to back this as a recovery story for some time,” Marwood said.

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