Thursday, September 16, 2021

Tesco shares plunge after profit warning

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Tesco shares are crumbling today, down more than 15% at the open, hitting lows not seen for at least ten years. The share price hasn’t closed below 160p since the millennium.

As of 9 a.m. GMT, the share price is at 164.25p, down 12.3% from yesterday’s close. That’s barely half of what it was at the beginning of the year.

Tesco issued a profit warning today that sparked the renewed sell-off:

In our interim results on 23 October we highlighted that full year profitability would be impacted by actions we may choose to take and that the commercial income overstatement would affect second half results as we revisited our plans with the new management team… On the basis of the changes and investments made to date we now anticipate group trading profit for the financial year ending February 2015 will not exceed £1.4billion.

As of November 21, Tesco published analyst expectations for its profit in the year ending February 2015 which are considerably higher. In fact, the lowest analyst estimate still ran to £1.8 billion.

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This is probably an unavoidable clean-up effort. Tesco has struggled to manage its top spot as the UK’s biggest retailer (and the world’s second biggest), and an enormous provide overstatement has worsened its structural issues. The gaffe meant Tesco had to revise its profit before tax for the first half of the year down by more than 90%. An investigation was called and many senior executives were suspended.

Here’s Mike van Dulken at Accendo Markets, offering his take in a note:

Stop! Unidentified item in the bagging areas! While it’s slogan may be ‘every little helps’, Tesco’s decision to take the rule-of-three a step further with another profits warning is no laughing matter or more satisfying/effective for loyal and battered shareholders. While new CEO Dave Lewis and his team may be taking all the right steps to restore confidence in the UK’s biggest grocer by market share after its accounting troubles of late and trying to keep the continually gaining cut-price competition at bay, the short-term impacts on profitability are being punished mercilessly

Tesco’s problems might be a long-term issue, but this particular correction seems to be about a short-term shortfall in profits, even if the painful adjustment is necessary.

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