News Column

Tesco Brings In New CEO Early As It Warns Of Sharp Profit Falls

August 29, 2014

Steve McGrath

LONDON (Alliance News) - Tesco PLC Friday brought forward the start date for its new chief executive and tasked him with conducting a review of the whole group, after it slashed its interim dividend, cut its capital expenditure plans and said it expects trading profit to be significantly lower than last year.

Incoming Chief Executive David Lewis will now take the helm at the UK's biggest retailer on September 1, a month earlier than previously flagged.

In a trading update, Tesco said trading conditions remain challenging and its ongoing investments in its customer offer - which includes big price cuts - have weighed on its expected performance. It said it was uncertain about how fast the benefits of the investments it is making would flow through in the second half of its financial year.

It said it now expects its trading profit in the current financial year that ends in February 2015 to be between GBP2.4 billion and GBP2.5 billion, and trading profit for the first half ending August 23 to be about GBP1.1 billion.

That's a significant drop from the GBP3.32 billion trading profit it posted in the whole of its last financial year, and the GBP1.59 billion in trading profit it posted in the first half of that year.

The retailer, one of the biggest in the world, grew quickly during the 1980s and 1990s, overtaking established UK rivals like J Sainsbury PLC to become by far the biggest UK retailer. However, it has struggled in recent years as its offering started to lose popularity in the UK, and it made a failed bid to enter the US market.

Recently, it said it would invest heavily in its customer offering, triggering a price war in the mainstream UK grocery sector that is losing market share to discount grocers like Aldi and Lidl and premium grocers like Waitrose.

Outgoing CEO Philip Clarke has been heavily criticised by investors for failing to turn around its struggling UK operations, and Lewis will be under pressure to drive results.

"He will be reviewing all aspects of the group in order to improve its competitive position and deliver attractive, sustainable returns for shareholders," Tesco said.

It said it expects to set an interim dividend of 1.16 pence, 75% below last year's interim dividend. This reflects the retailer's current expectations of future performance and its focus on maintaining a strong financial position it said.

Tesco also said it will further cut capital expenditure, and now expects to spend no more than GBP2.1 billion in the current year, about GBP0.4 billion less than originally planned and GBP0.6 billion less than its capital expenditure in its last financial year. It said it will cut spending in a number of areas, including IT and a slower roll-out of its store refresh programme.

"The actions announced today regarding capital expenditure and, in particular, dividends have not been taken lightly. They are considered steps which enable us to retain a strong financial position and strategic optionality," Chairman Richard Broadbent said in a statement.

"The board's priority is to improve the performance of the group. We have taken prudent and decisive action solely to that end. Our new Chief Executive, Dave Lewis, will now be joining the business on Monday and will be reviewing every aspect of the group's operations. This will include consideration of all options that create value for customers and shareholders," he added.

Tesco shares opened down 9.9% at 222.00 pence Friday, the biggest decline on the FTSE 100. It weighed on the whole retail sector, with J Sainsbury down 4.6% and Wm Morrison down 3.6%.

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Source: Alliance News

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