Tesco Chairman to Leave as Accounting Missteps Hit ProfitPaul Jarvis
Tesco Plc Chairman Richard Broadbent will leave after the U.K.’s biggest supermarket company said accounting irregularities started earlier than this year and will continue to impact profit in the second half.
Profit was overstated by 263 million pounds ($422 million), with more than half of that amount pre-dating this year, the Cheshunt, England-based company said today. Chief Executive Officer Dave Lewis, who took the helm last month, said he’s unable to provide any guidance on full-year profit, sending the shares down as much as 7 percent.
“The task of rejuvenating the company has been made all the more difficult in light of the accounting irregularities,” Neil Saunders, managing director of consumer-research company Conlumino, wrote today. Broadbent’s departure “will ultimately help Tesco move on from the incident.”
The grocer said last month it had overstated a profit estimate by an estimated 250 million pounds, prompting investors including Warren Buffett to cut their stake. Tesco said today first-half earnings plunged 41 percent amid slumping sales both at home and internationally, and provided little detail on Lewis’s strategic plans for a turnaround.
The shares traded 6.3 percent lower at 171.40 pence as of 2:03 p.m. in London. The stock has slid 48 percent in 2014, and last week reached the lowest level in about 11 years. Buffett’s Berkshire Hathaway Inc. cut its stake in Tesco to less than 3 percent this month and the investor has said the investment was a “huge mistake.”
The misstatements, which stem from booking some revenue earlier than received and some costs later than incurred, “are a matter of profound regret,” Broadbent, 61, said today. The chairman said he will begin to “prepare the ground to ensure an orderly process for my own succession.”
Broadbent said that the decision to step down was his own and not the result of pressure from shareholders.
“I felt completely free in the decision I made,” he told reporters. “I am going because I choose to go.”
Lewis declined to give a deadline for finding Broadbent’s successor, or comment on the process.
“What we need as a business now is stability,” the CEO said on a call. “And having Richard at the helm to manage an orderly transition is important.”
Tesco has suspended eight senior employees, including its U.K. chief, as the probe into the overstatement has widened.
Deloitte LLP has finished its investigation into Tesco’s figures and the results will be handed over to the Financial Conduct Authority. The future of the suspended employees will depend on the result of the FCA probe. No one benefited financially from the overstatement, Tesco said.
“The Deloitte investigation established the what, the size of the issue we had,” said Lewis, 49, on the call. “The FCA will establish the why and the how.”
The CEO said his immediate goal is to “put Tesco back into a place where it is a force for good for customers.”
Asked about possible disposals, amid talk that the company may seek to strengthen its finances by selling assets including its southeast Asia division and the Dunnhumby data-analytics unit, Lewis said he will look at the portfolio and can “understand why people are speculating.”
Tesco isn’t currently considering raising money through a rights offering, the CEO said, while declining to rule out doing so in the future.
Given an increasing debt burden, Tesco “will probably need to sell assets or raise cash soon,” said Rickin Thakrar, an analyst at Espirito Santo in London. The grocer’s net debt rose to 7.5 billion pounds as of Aug. 23, it said today.
First-half trading profit slumped to 937 million pounds, Tesco said. Of the overstated profit, 118 million pounds related to the first half and the rest to prior periods, Chief Financial Officer Alan Stewart said at the briefing.
U.K. sales at stores open at least a year fell 5.5 percent in the second quarter, excluding gasoline and value-added tax, amid an onslaught from discounters Aldi and Lidl. The U.K. trading margin narrowed to 2.3 percent of sales.
“We can never recall a period so damaging to the reputation of the company,” Darren Shirley, an analyst at Shore Capital, said in a note. “Today is hopefully the start of a new chapter for Tesco from a disclosure perspective, where a line of sorts can be drawn under what one can only hope has been the darkest hours.”