Tesco, the third-largest global retailer by sales and the leading grocery store in Britain, announced Thursday that its chairman would step down and that it had overstated profits by £263 million, or about $423 million, slightly more the company had revealed last month.
The company, hobbled by eroding sales and the profit scandal, also revealed for the first time that the accounting irregularities stretched back further than it had first disclosed. It said that £118 million of the shortfall related to the first half of this year, with another £145 million linked to the past two years.
"The issues that have come to light over recent weeks are a matter of profound regret," the chairman of Tesco's board, Sir Richard Broadbent, said in a statement. "We have acted quickly to clarify the financial performance of the company. A new management team is in place to address the root causes of the misstatement and to develop and implement the actions that will build the company's future."
Dave Lewis, the chief executive who took over last month in a management shake-up, said that there was no timeline for Broadbent's departure and that the company was in engaged in a strategic review of all its operations. He did not give a deadline for that review.
Broadbent joined the board in July 2011 and became chairman in November 2011. He has been strongly criticised for his leadership and is associated with Philip Clarke, the past chief executive whose strategy failed to turn Tesco around.
Lewis, a former Unilever executive, said that a line had been drawn under the accounting issues and that the company would now focus on "putting the customer back at the center" of what Tesco does.
No one made any financial gain from the misstatements, he added.
"We had a difficult issue in terms of accounting," Lewis said on an early call with reporters. "We gripped hold of that in a decisive way, we have drawn a line under that, and we move forward."
Lewis said that the accounting firm Deloitte, which was hired to conduct an internal investigation, had concluded its inquiry but that the Financial Conduct Authority, Britain's top financial regulator, was still looking into the company.
Tesco also announced sharp declines in its first half results on Thursday. Trading profit fell 41 percent to £927 million from the prior year to August 23.
Statutory profit before tax dropped 92 per cent to £112 million, while British like-for-like sales, a measure of retail strength, fell 4.6 per cent on strong competition in the grocery sector.
"Today's results highlight the major structural shift we are seeing in the market, and Tesco, in its current position, is not in a good position to compete because of its reliance on large out-of-town stores," said Natalie Berg, global research director for Planet Retail.
The news comes amid tumult. In September, the struggling retailer announced that, by way of an internal whistle-blower, it had discovered a possible overstatement of £250 million in profits from its August 29 earnings forecast.
The discrepancy, it said, was from booking promotional income from suppliers too quickly while pushing out costs too far into the future. The company confirmed on Thursday that the irregularities related to commercial income.
Deloitte confirmed to the company that "amounts have been pulled forward or deferred, contrary to Tesco Group accounting policies; there have been similar practices in prior reporting periods and the current and prior practices appear to be linked as income pulled forward grew period by period," Tesco said in its announcement on Thursday morning.
One question for Tesco is what to do about its auditor, PricewaterhouseCoopers. The board last year asked PwC to look at how Tesco booked payments from suppliers. The PwC accountants conducted an examination and gave the company a clean bill of health in March.
In announcing the irregularities last month, Tesco said it had brought in Deloitte to conduct a review alongside Freshfields, Tesco's legal advisors.
The stock, which is down by half for the year, fell about 5 per cent in early trading on Thursday.
Since September, eight executives have been suspended from their duties as the company investigated the issue. Lewis said their status was not yet clear. He also confirmed that the former chief executive, Clarke, and the chief financial officer were not being paid until the investigation was over.
This month, Lewis added two non-executive directors to the board, both with significant retailing backgrounds: Richard Cousins, chief executive at the food service company Compass Group, and Mikael Ohlsson, who was chief executive and president of the Ikea Group until September 2013. Analysts and shareholders have been critical of Tesco's board for lacking the sector expertise needed to fix the company.
The misstatement came as the company was caught in a storm of radical industry change, management missteps, accounting questions and internal gridlock.
Every industry trend seems to be going against the company, including the rise of discounters at one end of the spectrum and upscale grocery stores like Waitrose at the other.
On Tuesday, Kantar Worldpanel, which tracks grocery store sales in Britain, noted that Waitrose had increased sales by 6.8 per cent in the last year, continuously growing them every month since March 2009 and increasing its market share to 5.3 per cent. Aldi, the private German discounter, grew its sales by 27 per cent, resulting in a market share of 4.8 per cent.
Tesco, it noted, "seems to be turning a corner as sales are down 3.6 per cent, which is the grocer's best figure posted since June."
On both an industry and company level, Tesco is facing multiple headwinds.
This month, David McCarthy, an HSBC analyst, said Tesco needed to slash its food prices by five per cent to six per cent, increase staff numbers and improve the quality of its products. The price tag? About £3 billion to turn around its British operations. And he thought it might take six years to accomplish.
Yet he thinks much of the bad news is priced into the stock and recently upgraded the shares from sell to neutral.
"Eventually, we think Tesco could emerge as the long-term winner amongst the quoted sector and should be able to take the fight to the discounters," McCarthy said.
The accounting issues have taken a toll on the company's already battered reputation. Broadbent acknowledged as much.
"My decision reflects the important principle of accountability on behalf of the board and will support the company to draw a line under the past as it enters the next phase of its development," he said in the statement.
©2014 The New York Times News Service
