Tesco share collapse accelerates after accounting error

Tesco shares tumbled almost 12% on Monday morning after the UK’s largest supermarket firm issued its third profit warning in 9 weeks and said first-half profit figures were incorrect.

Tesco has called in accountants Deloitte for a “comprehensive” review of its accounts.

The grocer’s accounts are usually prepared by Deloitte’s fellow ‘big four’ firm PricewaterhouseCoopers.

“We have uncovered a serious issue and have responded accordingly,” Dave Lewis, the supermarket’s CEO said.  He has been in the role for less than a month, having started work weeks earlier than planned.

“The chairman and I have acted quickly to establish a comprehensive independent investigation,” Lewis said.

“The board, my colleagues, our customers and I expect Tesco to operate with integrity and transparency and we will take decisive action as the results of the investigation become clear,” he added.

Four employees placed on leave after error discovered

The company said the error relates to its trading statement released in August.

The trading statement provided a forecast which was incorrect by £250m, said Tesco.

The error was discovered during preparations for its forthcoming interim results, which have now been pushed back to 23rd October from the earlier scheduled date of 1st October.

Tesco said four employees had been placed on leave during the investigations.

News reports suggest the MD of Tesco’s UK business Chris Bush, was among the four.

The mistake was “principally due to the accelerated recognition of commercial income and delayed accrual of costs”, as well as timing differences, specifically in the UK food business, Tesco said.

This is not the first time Tesco has run into problems due to its accounting practices.

In July 2010, an analyst at US investment bank Citigroup said Tesco had a “more aggressive policy” than its competitors in the areas of revenue recognition, depreciation, allocation of profits from property, capitalised interest expenses and pension accounting.

In August Tesco provided a forecast of trading profit—basically operating profit excluding property gains or losses.

It forecast trading profit for the six months to 23rd August would be around £1.1bn.

157p price target not so aggressive after all

Tesco has now racked up three profit warnings in the last nine weeks as it frantically tries to fight back against pricing pressure from several fronts in the UK grocery market.

After a profit warning in August Tesco also cut its interim dividend by 75% and said it would reduce capital spending by £400m to £2.5bn

At the time of Tesco’s August profit warning, we suggested the drastic reduction in dividend would induce forced and opportunistic selling of the stock by institutions and by short sellers respectively.

We suggested an “aggressive” target around 157p, that price being the most recent major, long-standing support.

With Tesco’s latest debacle, we’re wondering if the target is so ‘aggressive’ after all.

The share price is currently 209p, down about 9%. The shares are more than 44% lower on a 52-week basis.

The rate of decline in the current down-leg that commenced in May, if sustained, could approach the 157p-160p area as early as mid-December.