|one of the few positive areas!|
A couple of weeks later and news that Tesco had suspended four executives, including its UK managing director, after the supermarket overstated its half-year profit guidance by £250m. It launched an investigation headed by Deloitte.
During this turmoil, the share price has taken a pummelling, falling over 40% from £3.34 at the start of the year to well below £2.00 in September.
Today the company has issued its delayed interim results for the 6 months to end August 2014 (link via Investegate).
- UK like-for-like sales down (4.6)%, impacted by strong competition across the grocery market, headwinds from price cuts and fewer untargeted promotions
- £0.9bn Group trading profit - year-on-year decline reflects challenges of UK business
- Total UK online sales up 11%; like-for-like sales growth of +0.8% in UK convenience stores
- Interim dividend 1.16p confirmed; full-year capex reduction to £2.1bn
- New Executive team in place and reviewing all strategic options to create greater shareholder value
The Deloitte investigation into the validity of the figures has now concluded, and has confirmed there was an overstatement in profit expectations of £263m. The impact to trading profit is £118m in the first half of this year, with a further c.£70m relating to the previous year and c.£75m relating to pre-2013/14 treated as one-off items within these results.
In addition, the chairman Sir Richard Broadbent has agreed to step down, which I think was inevitable given the record under his 3 year tenure of office. Just wondering what his pay-off package will amount to?
There was no hint of any decisions on the final dividend - I expect this will now come with the Q3 update in January - I am still hoping for something less severe than the 75% cut to the interim.
On the positive side, Tesco Bank's trading profit increased by 15.9% year-on-year to £102m, driven by strong lending growth. Excluding fair value releases, trading profit grew by 18.8%. Tesco's UK online sales continue to increase as do sales from the smaller convenience stores.
Net debt increased by £500m year-on-year to £7.5bn. This included the impact of the reduced level of operating cash flow and the investments in the China and India joint ventures. The increase was partially offset by the disposal of China net debt and lower capital expenditure. The management have ruled out a rights issue to bolster the balance sheet so I imagine they must be looking to raise capital from disposals of non-core assets - maybe Dobbies garden center would be a good place to start?
All in all, a pretty gloomy picture and it looks like I was too hasty to jump in with my top up of shares last month. However the turnaround is underway and although there are sure to be a few more bumps along the road, I have every confidence the new CEO and his team can get things back on track. Sainsbury went through significant problems over a decade ago before finding stability again and restoring the dividend and shareholder value under Justin King.
Tesco is still a very large business whose fortunes can and will be restored. At the time of posting, the shares are down 5% at 173p.
Once again, patience and a focus on the longer term outlook is the order of the day. More on this in early January.
Be interested to hear what others think of Tesco - feel free to leave a comment below.