Tesco Issues Profit Warning -- 3rd Update

By Peter Evans 

LONDON-- Tesco PLC on Tuesday slashed its full-year profit forecast as the British retailer continued to pay the price for a recent accounting scandal and years of underinvestment in its home market.

Tesco, which vies with Carrefour SA for the title of world's second-biggest retailer behind Wal-Mart Stores Inc., said group trading profit for the year to February wouldn't exceed GBP1.4 billion ($2.19 billion). Analysts had previously forecast a figure of around GBP1.94 billion.

The reduced forecast marks Tesco's fourth profit warning in six months and sent the company's shares plummeting in early London trading. The shares touched a 15-year low of 155 pence and around 9 a.m. GMT were down 12% to 165 pence, near 11-year lows.

Tesco said it had in recent weeks implemented new policies and procedures--including the retraining of staff working in the finance department--to govern its commercial income to ensure revenue recognition is transparent and appropriate.

The move comes after the retailer was hit by an accounting scandal that involved the company overstating a profit forecast and resulted in the departure of several senior executives.

Commercial income refers to promotional money, discounts and rebates from suppliers. Tesco has admitted that in previous periods it recorded the commercial income on its books as revenue before recognizing the cost of paying for the goods from suppliers.

Tesco Chief Executive Dave Lewis, who has worked at the company for less than four months, said in October he hoped to move on from the accounting scandal and focus on reviving the retailer's flagging U.K. business. "We will draw a line under the accounting issue as of now," he said.

But since then, the U.K.'s Serious Fraud Office has said it would launch an investigation into Tesco's accounting, raising the possibility of criminal convictions for individuals, or the entire company.

Tesco also said it had taken steps to improve the competitive position of its business, investing in adding more than 6,000 employees in U.K. stores, increasing product availability on key lines and reducing prices.

Tesco is still the U.K.'s biggest retailer by sales but has faced years of falling market share amid intense competition from higher-end grocery stores and aggressive discounters.

"We still have much to do but are making good progress in developing our plans to improve the long-term positioning of the group," Mr. Lewis said.

Mr. Lewis added that the company would share more details about the measures it is taking to improve the competitiveness of its U.K. business on Jan. 8.

Rory Gallivan contributed to this article.

Write to Peter Evans at [e-mail]

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