Cheshunt / UK. (tesco) Tesco PLC announced its unaudited results for the 26 weeks ended 23 August 2014. Chairman Sir Richard Broadbent: «The issues that have come to light over recent weeks are a matter of profound regret. We have acted quickly to clarify the financial performance of the company. A new management team is in place to address the root causes of the miss-statement and to develop and implement the actions that will build the company´s future. I am confident that the new Chief Executive and Chief Financial Officer will move rapidly and effectively in this respect».
«Once this transition is complete and business plans are in place, it will mark the beginning of a new phase for the company and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time. My decision reflects the important principle of accountability on behalf of the Board and will support the company to draw a line under the past as it enters the next phase of its development», Broadbent said in a statement, presenting Tesco´s Interim Results 2014/2015.
Chief Executive Dave Lewis: «Our business is operating in challenging times. Trading conditions are tough and our underlying profitability is under pressure. We do however face these challenges from a position of market strength and I have been heartened by the team´s welcome and their determination to stay focused on doing the very best for our customers. Whilst my review of the whole business continues, three immediate priorities are clear: to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand».
Highlights for the 26 weeks ended 23 August
- UK like-for-like sales down (4.6) percent, impacted by strong competition across the grocery market, headwinds from price cuts and fewer un-targeted promotions
- 0.9 billion GBP Group trading profit – year-on-year decline reflects challenges of UK business
- Total UK online sales up eleven percent; like-for-like sales growth of 0.8 percent in UK convenience stores
- Deloitte investigation into overstatement of expected half year profit concluded; impact confirmed as (263) million GBP, of which (118) million GBP relates to first half trading profit, with the balance treated as a one-off item (being about(70) million GBP relating to 2013/2014 and about (75) million GBP to pre-2013/2014)
- Interim dividend 1.16 Pence as previously announced; full-year capex reduction to 2.1 billion GBP
- New Executive team in place and reviewing all strategic options to create greater shareholder value
The complete news release «Interim Results 2014/2015 for the 26 weeks ended 23 August 2014 – unaudited» is available on the company´s web server.
Chairman´s Overview
When I took over as Chairman three years ago, I was aware that the scale of change for this company would be substantial. Structural change in this industry was accelerating and internally the business had been through a prolonged period of expansion. In response, we took substantial steps to underpin the future of the business.
It is in this context that on 22 September we announced an overstatement of our expected profits for the half year (see b:eu on 2014-09-24) due to the accelerated recognition of commercial income and delayed accrual of costs in the UK food business. The Board immediately asked Deloitte to undertake an independent review of these issues working with Freshfields, the Group´s legal advisers. Following our announcement on 22 September, Alan Stewart joined the Board immediately as Chief Financial Officer.
The Deloitte investigation into the validity of the figures has now concluded, and has confirmed our assessment that there was an overstatement in our profit expectations of (263) million GBP. The impact to trading profit is (118) million GBP in the first half of this year, with a further about (70) million GBP relating to 2013/2014 and about (75) million GBP relating to pre-2013/2014 treated as one-off items within these results.
The Deloitte Report will be passed to the Financial Conduct Authority (FCA) and to other regulatory agencies. As announced on 01 October 2014, the FCA has launched an investigation into the issue. We will fully cooperate with the regulatory authorities. Given the outstanding investigation, we can make no further statement at this stage about how these events came about.
Notwithstanding this deeply disappointing issue, the business continues to face the challenges of difficult markets and intense competition. There is much to do in improving our offer to customers and re-positioning our business to meet modern retail requirements. Since the beginning of the year, the Board has taken tough decisions on capital and dividend to preserve the financial strength of the company and replaced the executive leadership of the business. We have also announced new non-executive appointments to the Board.
Dave Lewis joined Tesco as Chief Executive on 01 September, one month earlier than previously anticipated. He is reviewing all aspects of the Group in order to improve its competitive position and deliver sustainable returns. Consideration will be given to all options which increase flexibility and create value for customers and shareholders.
Stability and orderly process are now of primary importance to the company. The Board´s immediate focus must be on ensuring that we complete the transition to a new management team and that new and far-reaching business plans are put in place quickly. These plans will mark the beginning of a new phase for the company and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time. My decision reflects the important principle of accountability on behalf of the Board and will support the company to draw a line under the past as it enters the next phase of its development.
The Deloitte Review
We announced on 22 September 2014 that Deloitte, supported by the Company´s external lawyers, Freshfields, had been appointed to carry out an independent review into the matters which had come to light in our UK food business. Deloitte has now presented its findings, which validate our assessment of the size and nature of the income overstatement, and thereby provide us with additional assurance for the purposes of the announcement of our interim results. Deloitte, in their review of our conclusions, has confirmed that:
- our overall commercial income adjustment in the current reporting period of 263 million GBP is reasonable;
- amounts have been pulled forward or deferred, contrary to Tesco Group accounting policies;
- there have been similar practices in prior reporting periods;
- the current and prior practices appear to be linked as income pulled forward grew period by period.
As we confirmed on 01 October 2014, the FCA has commenced a full investigation. Other regulatory authorities are reviewing the situation. The nature of the FCA investigation precludes Deloitte from continuing their work into the causes of the overstatement. The Deloitte independent review is therefore now complete. This issue raises many questions which will now be examined in the context of the FCA investigation. We will continue to cooperate fully with the FCA and any other regulatory authorities.
Outlook
We have three immediate priorities. The first is restoring competitiveness in our core UK business. The second is protecting and strengthening our balance sheet. The third is to begin the long journey of rebuilding trust and transparency in the business and the brand. Our relative performance was not competitive enough in the first half of the year and the business continues to face a softening market and tough trading conditions, particularly in the UK. In this challenging environment we will continue to invest for customers. We are reviewing all opportunities that exist within the Group to generate value and create headroom. Full year profitability could therefore be further impacted by actions we choose to take. In addition, the commercial income overstatement will affect our second half results as we revisit our plans with new management. As such, there are a number of uncertainties which limit visibility of future performance. We will do the right thing for customers – and therefore the business – despite these uncertainties. For these reasons we are not providing full year profit guidance. Our next update to the market will be our Christmas trading statement on 8 January 2015, when we will also update on our third quarter performance.
The complete news release «Interim Results 2014/2015 for the 26 weeks ended 23 August 2014 – unaudited» is available on the company´s web server.
Non-executive Board changes
Cheshunt / UK. (10.06. / tesco) Tesco PLC announced that Richard Cousins and Mikael Ohlsson will join the Board of Tesco on 01 November 2014 as Non-executive Directors. Richard has been Group CEO of Compass Group PLC since 2006. He was a Non-executive Director of Reckitt Benckiser Group PLC from 2009 until May 2014 and of HBOS PLC and Bank of Scotland from 2007 to 2009. He will bring valuable UK and international corporate experience to the Board. Mikael was until September 2013 CEO and President of the Ikea Group. He is a Non-executive Director of Volvo Car Corporation, Ikano S.A. and Lindengruppen. He will bring valuable retail and international experience to the Board. Sir Richard Broadbent, Chairman, said: «I am delighted to welcome Mikael and Richard to the Board and know that their broad skills and experience will be a real asset to the Company in the coming years. Mikael and Richard have been updated on and are wholly supportive of the steps being taken by the new management team to rebuild trust in Tesco and to focus all the resources of the business to deliver value to our customers».
Regulatory Update
Cheshunt / UK. (10.01. / tesco) The Financial Conduct Authority (FCA) has notified Tesco PLC that it has commenced a full investigation following the overstatement of expected profit for the half year which was described in our announcement of 22 September 2014 and which is currently the subject of an independent review by Deloitte. Tesco will continue to co-operate fully with the FCA and other relevant authorities considering this matter.
