Graeme Wearden 

£2bn wiped off Tesco’s value as profit overstating scandal sends shares sliding – as it happened

Bleak day for Britain’s biggest supermarket chain as new chief executive warns that first-half profits were overstated by around £250m, and suspends four senior executives
  
  

A Tesco sign.
A Tesco sign. Photograph: Rui Vieira/PA

Read the full story here

Hot off the digital press, here’s the Guardian’s news story on the new crisis at Tesco, by my colleagues Zoe Wood and Sean Farrell:

Tesco has been plunged deeper into crisis after it was forced to suspend four senior executives and call in investigators following the discovery that its profits had been artificially inflated by £250m.

More than £2bn was wiped off the value of Britain’s biggest retailer on Monday after its new chief executive told the City that forensic accountants and lawyers had been drafted in to scrutinise its books in the wake of a warning from a whistleblower that payments from suppliers were being misbooked and business costs were being glossed over. Tesco said the changes had misleadingly boosted profits by £250m in the first six months of the year.

The retailer, which banked £1.6bn profit in the first six months of 2013, is now expected to make half that this year. The seriousness of the situation meant the figure could fall further still.

One of the four men suspended was Chris Bush, the most senior executive outside the Tesco boardroom as the manager who oversees its UK operations, which rang up sales of £48bn last year. “We have uncovered a serious issue and have responded accordingly,” said Tesco’s chief executive, Dave Lewis, who admitted he did not yet know whether the practice had been going on for some time.

There were reports that senior staff at what is the UK’s largest private-sector employer had been asked to hand in company laptops and phones as the inquiry, led by the accountancy firm Deloitte and law firm Freshfields, got under way.

Lewis, who has been running Tesco for just three weeks after his predecessor, Phil Clarke, was axed amid a sales slump, said the matter had also been reported to the Financial Conduct Authority. The regulator has the power to prosecute those who make deliberately or recklessly misleading statements to the stock exchange. The company has also been forced to take the unprecedented step of delaying reporting its half-year results to the City by three weeks.

Tesco refused to name the individuals at the centre of the investigation but they are understood to be Bush, who has worked for Tesco for 32 years, his number two, Carl Rogberg, John Scouler, its commercial director, and Matt Simister, head of group sourcing.....

Click here for the full story: Tesco loses £2bn in value as profit overstatement investigation begins.

And that’s all for tonight. My early-evening summary at 5.55pm BST has the key points, analyst reaction and share price plunge information.

And the rest of today’s liveblog is packed with details, analysis and reaction of how Tesco’s Day to Forget began.

It started with the shock announcement at 7am, followed by a bruising conference call with reporters; continued by a swathe of criticism from City analysts, leading to £2bn being wiped off its value as its shares slumped 11.5%.

Fitch’s decision to put Tesco on rating watch negative rounded off an awful day for Tesco, as shareholders begin to demand answers and War on Want warns that a new price war could be devastating for food suppliers.

What will tomorrow hold? Not long to find out! Goodnight, and thanks for reading and commenting. GW

There’s also bad news tonight for many staff at Phones4u, the high street retailer which collapsed last week.

Administrators from PwC* have announced the closure of 362 stores, with the loss of almost 1,700 jobs. The news came hours after EE agreed to buy 58 stores. Vodafone snapped up 140 late last week.

* -yes, the same PwC who have been auditing Tesco’s accounts for around 30 years. It’s a small world...

There’s not a huge amount of sympathy for Tesco on social media tonight; as shown by this dairy farmer:

Tesco’s £250m profit blunder centres on the way it accounted for supplier contracts, and also how it accounted for waste food, Reuters explains:

People familiar with the matter said the company had been overly ambitious when predicting the sales of products in its UK food business. This in turn reduced the cash rebates Tesco receives from suppliers who pay out when certain volumes are achieved.

They also said Tesco had mis-reported in its accounts the costs of “waste”, which is out of date food, and “shrinkage”, which is stolen or unaccounted for product.

Tesco's big shareholders demanding answers

As we flagged up earlier today, there is pressure on Tesco’s chairman, Sir Richard Broadbent, to explain how such a calamitous mistake could have been made.

The FT has sounded out a few big investors, and reports:

One top 20 shareholder said “It is difficult to understand why this has happened. We want to speak to the chief executive to find out exactly what is going on.”

Another top 20 shareholder said: “It’s a real shocker. We are not clear what has happened here. It is too early to start calling for the chairman’s head or anything emotive like that, but we do want some answers. It has been one piece of bad news after another.”

Updated

War on Want: Food producers will suffer if Tesco launches a new price war

John Hilary of War on Want has warned that small producers could suffer badly if Tesco tries to squeeze more costs out of its supply chain.

A new price war between supermarket chains would simply be “a race to the bottom”, and we’ve seen in the past that the people who end up paying are the producers, he told Channel 4 News.

Updated

Allister Heath of the Daily Telegraph is on Channel 4 News now, saying it’s been a dreadful day for Tesco and a pretty bad one for the City generally.

No argument there.

The question now, Heath adds, is whether Tesco can be turned around.

The FT have pulled together a handy Q&A on how Tesco could have overstated its profits by so much.

Here’s a flavour:

Why do suppliers make payments to Tesco?

The UK’s grocery market is so competitive, big brands will bid against each other for the best spots on Tesco’s shelves.

Some suppliers pay a listing fee for their product to be carried in Tesco’s stores, and that fee rises for smaller Express stores where fewer product lines are carried. Brands will also pay to secure a prime position on Tesco’s shelves, and to fund certain promotional activities.

These all stimulate volumes of sales. The advantage to suppliers and manufacturers is that the more product shifted, the more efficiently their factories can operate.

What form do these payments take?

The problem relates to the extra incentives, often called “rebates”, that Tesco receives from suppliers for hitting a certain level of sales, or for support for promotions, according to two people familiar with the situation.

Tesco and other supermarkets must always estimate halfway through the year how much these rebates will be worth for the full year.

For example, Coca-Cola could offer a percentage discount on 2-litre bottles if 20m of them were sold in a specific period – but it will only pay this rebate if the sales target is hit. Tesco’s UK sales volumes have dropped as it loses market share to competitors, so there is a risk that such volume-driven rebate targets could be missed.

So deciding exactly how large these payments are, and when they are ‘banked’ in the accounts, can be a grey area. Although in Tesco’s case, it’s pretty black and white that something has gone wrong.

Associated Press's take

Here’s Associated Press’s take on the Tesco crisis tonight, for the benefit of new readers:

Tesco suspends execs over inflated profit report

Tesco, the world’s second-largest supermarket chain after Walmart, has suspended four executives and launched an accounting investigation after admitting that its half-year profit was overstated by £250m.

The scandal deepens the financial woes for the British company, which on Monday had to issue its third profit warning in two years as it struggles to compete with low-cost rivals. The announcements shocked investors, with shares plunging 11.6% to 203p at market close Monday.

The investigation, prompted by information from a whistleblower, comes less than a month after the new chief executive, Dave Lewis, was brought in to turn around the company’s business.

Lewis said in a statement:

“We have uncovered a serious issue and have responded accordingly,”

Lewis took over from Philip Clarke after the company issued a profit warning at the end of August. At the time, Tesco said it expected to report “trading profit” of about 1.1bn for the six months ended Aug. 23. The retailer now plans to release its earnings for the period on Oct. 23, three weeks later than previously scheduled.

Tesco has long dominated the supermarket industry in Britain, but has recently been squeezed by aggressive cost-cutting competitors such as Lidl and Aldi.

The company, which last year was the world’s second largest food retailer after Walmart when measured by revenue, said the overstatement of profits resulted from reporting commercial income too early and delays in booking some costs. The company asked audit firm Deloitte to begin an independent review, along with the group’s external legal advisers.

Lewis stressed in an interview with the BBC that the decision to ask employees to stand aside was not an indication of guilt or that disciplinary action was warranted. He declined to speculate on what he might discover, but described it as a single incident.

“This is about getting to the bottom of a full and frank inquiry of what happened,” he said.

The company does not have a chief financial officer at the moment. Alan Stewart begins work in December.

Shore Capital analyst Clive Black said the development is flabbergasting.

“Such an announcement is not the stuff of a well operated FTSE-100 organization.”

Neil Saunders, managing director of retail consultancy Conlumino, said that while mistakes happen, it gives the impression of a company which is not fully in control of internal procedures.

“More significantly, it means that performance which is already extremely weak is actually much weaker than anticipated,” he said. “This is something that will alarm investors and means that Tesco has much further to travel to recovery than first thought.”

Do check my earlier summary for the key points too.

Updated

And here’s more expert reaction to the Tesco crisis tonight.

Early evening summary

I think it might be helpful to recap, with links to the key points in the liveblog.

It’s been a dark day for Britain’s biggest retailer, Tesco, after it shocked the City by admitting that it had overstated its forecasts for profits by a staggering £250m.

The revelation, reported by a whistleblower on Friday, prompted the company to suspend four senior executives over the weekend.

City analysts said they were flabbergasted by the latest crisis at Tesco, which had already made three profit warnings this year.

The company’s share price has slumped to an 11-year low today, down 11.5% to 203p. That wipes more than £2bn off off its market capitalisation, from £18.78bn to £16.5bn.

Tesco’s shares have lost 40% of their value this year alone.

Rating agency Fitch piled more pressure on Tesco tonight, putting the company’s credit rating on rating watch negative.

Retail experts are still baffled tonight as to how such a huge reporting error could have been made. It centres on the early booking of “commercial income” - thought to include payments from suppliers for preferential treatment in Tesco’s stores - and delayed recognition of costs.

CEO Dave Lewis, who joined Tesco from consumer goods giant Unilever under a month ago, said he is determined to find exactly what happened. Bonuses could be clawed back once an inquiry, led by Deloitte, has been conducted.

Lewis told the City at 7am BST that:

“We have uncovered a serious issue and have responded accordingly. The Chairman and I have acted quickly to establish a comprehensive independent investigation.

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.”

And here’s a video clip, via ITN.

The four executives suspended include Chris Bush, Tesco’s UK managing director, along with UK finance director Carl Rogberg, food commercial director John Scouler and Food sourcing director Matt Simister.

While Lewis cannot be blamed for the debacle, chairman Sir Richard Broadbent’s position is shakier.

Clive Black of Shore Capital Stockbrokers says there are:

..fundamental questions over the Chairman’s position.

Broadbent has said he plans to stay on at Tesco to fix its problems, to be “part of the solution”.

Tesco has asked Deloitte to work with Freshfields, its external legal advisers, to analyse what has gone wrong.

  • Bernstein analyst Bruno Monteyne said the bringing in of Freshfields “implies there is potential foul play, beyond simple account stretching.”
  • UK business secretary Vince Cable said the Financial Reporting Council (FRC), the body that oversees corporate behaviour, could be called in to investigate Tesco if it transpires that “serious malpractice” had taken place.
  • Crawford Spence, a professor of accounting at Warwick Business School, reckons Tesco’s management succumbed to temptation to play around with its numbers to cover up the full impact of falling sales.
  • Portuguese bank Espírito Santo has claimed that Tesco’s profits in the UK could soon fall to zero.
  • While HSBC’s David McCarthy has warned that confidence in Tesco has been badly undermined. He’s worried that Dave Lewis now faces a major fire-fighting operation, rather than being free to tackle Tesco’s other problems.

There’s loads more reaction if you scroll back through the live blog, or even start at the beginning.

Here is a summary of Tesco’s conference call with UK financial journalists:

Updated

Nils Pratley: Profit overstatement could be larger than £250m...

The Guardian’s financial editor, Nils Pratley, warns tonight that we may not yet know the full scale of the crisis at Britain’s biggest retailer.

This morning’s shock admission that various earnings from Tesco’s own suppliers have been banked early, and that some costs have been deferred, could be just the start of the matter.

Nils writes:

Tesco’s financial numbers have been poor for about three years – but at least shareholders thought they were an accurate account of the supermarket group’s troubles. Even that assumption is now exploded.

The revelation of a £250m “overstatement” in half-year profits forecasts was understandably short on detail but any warning that relates to when income is recognised tends to be toxic for a company’s reputation. For retailers that take up-front promotional payments from suppliers, this is basic accounting territory.

Accounting rules allow for some interpretation but when the figure at dispute is £250m – or almost a quarter of the £1.1bn of profit that Tesco was expecting to make in the first half of its financial year – it’s hard to imagine a benign explanation. New chief executive Dave Lewis, fresh from Unilever, implied as much by referring to the importance of “integrity and transparency”.

Note, too, that the figure is an early estimate, established only through a fast and furious probe over the weekend after a whistleblower dropped the bombshell on Friday. The final outcome, once accountants Deloitte and lawyers Freshfields have finished their work, could be higher.

Here’s Nils’s full comment:

Tesco’s turmoil can’t be overstated: it may go right back to the drawing board

Fitch puts Tesco on rating watch negative

More trouble for Tesco - Fitch, the rating agency, has just announced that it has put the company’s on rating watch negative.

That could be the prelude to downgrading Tesco’s credit rating, which is currently BBB.

Fitch said that it took the decision following Tesco’s admission that it had overstated its interim profits [by £250m] this morning.

Fitch warned that this profit revision “exacerbates negative trends in the core UK operations”, following several profit warnings this year.

Following the August profit warning, Fitch noted that the profitability of domestic operations, trading performance and market share remained under pressure over the summer period and that the EBIT margin erosion guided was sharper than previously anticipated in Fitch’s rating case.

This trend has been further accelerated as a result of the accounting errors and is evidence of the significant operational leverage in the business, particularly driven by Tesco’s dominant presence in the large scale hypermarket formats.

Fitch also says that today’s admission from Tesco confirms “risks” around its governance.

Fitch highlighted in its September comment that the group had been subject to management changes at senior and secondary level, which the agency viewed as a potential negative rating factor for the strategic development of the group in light of increasing competitive pressures in the UK food-retail market.

The full statement is online here: Fitch Places Tesco on Rating Watch Negative

Jim Osman, CEO at The Edge Consulting Group, has warned investors not to see Tesco’s share price tumble today as a buying opportunity.

Osman reckons small shareholders should keep away until the company’s future is clearer:

“We strongly advise investors to stay away from Tesco stocks. Tesco’s senior management team has severely misrepresented its figures and losses are just the start of major problems for the business. There’s little vision from senior management, with only small and ineffective changes being made, as the business continues to suffer decline.

A break-up may be the answer, to unlock the value in Tesco’s huge property assets:

Investors in Tesco must push for a massive restructuring and break-up of the business if they want to see any further return on their investment. By separating the retail arm of Tesco from its £20bn property portfolio, it will be able to deliver true value for shareholders and kick-start the transition towards profitability.

“Tesco’s CEO should be looking at the value potential that a break-up of the supermarket’s property portfolio will have for his shareholders and investors. Dave Lewis has to look beyond Tesco as simply being a retailer; it’s a retailer that has a substantial property empire and it must look at the possibilities of separating its property assets into individual listed companies.”

This chart, of Tesco’s share price over the last two decades, shows how shares hit an 11-year low tonight:

Tesco shares fall 11.5% to 11-year low

After a bruising day, Tesco shares have closed down 11.5% at 203p, their lowest level since June 2003.

That wipes around £2.1bn off the company’s market capitalisation.

Andrew Simms: Tesco is reaping what Leahy sowed

Over on Comment is Free, Andrew Simms argues that Tesco’s relentless and “blinkered” pursuit of profits over many years has been its undoing.

From putting suppliers in an “armlock” to relentlessly pushing on with store expansion even as shopping habits changed in the recession, Tesco’s overconfidence led it to today’s humiliation, he argues.

Here’s a taste:

“There are two types of chancellor,” Gordon Brown used to joke. “Those who fail and those who get out in time.”

Tesco’s former chief executive,Terry Leahy, now enjoying a lucrative career as a feted business guru, got out in time. The irony is that many of the problems now bringing the retail giant low are a legacy of the strategic decisions he made....

Tesco: why did it all go so wrong?

Updated

Retail advisor Paul Foley also suspects that Tesco’s weakening sales (down 3.8% earlier this year) prompted the profit overstatement.

Business Insider has a handy summary of the main developments at Tesco:

Jasper Lawler of CMC Markets says Tesco shares are being ‘crushed’ by unimpressed investors:

Hopes of a turnaround at Tesco after prior CEO Phillip Clarke departed two months ago have been dashed. Lewis is not responsible and has seemingly acted on the front foot since learning of the news but wider questions are being asked of Clarke and the Board of Directors including Chairman Richard Broadbent.

The more immediate worry for investors than the resulting investigation is that this is the 3rd profit warning in two months for Tesco who in the last quarter lost almost 1.5% of market share particularly to discounters newcomers Aldi and Lidl.

This chart shows how Tesco’s shares are now hitting new 11-year lows this afternoon.

Crumbs, Tesco’s shares are hitting new lows -- now down 12.5% at 201p.

Espirito Santo’s warning that UK profits could fall to zero (details), and HSBC’s suggestion that a rescue rights issue may be needed (details) may be spurring the selloff.

Deutsche Bank has now joined the party, slashing its target price from 250p to 220p.

Is time running out for Tesco's chairman?

We can’t blame Dave Lewis for this crisis at Tesco, given he only arrived at the supermarket less than a month ago.

The knives are being sharpened for chairman Sir Richard Broadbent, though.

Broadbent is a former Treasury mandarin who went on to chair Her Majesty’s Customs and Excise, and later became Deputy Chairman of Barclays in 2010. Not much retail experience on that CV, the Wall Street Journal points out.

“The pressure is clearly mounting higher and higher,” said Bernstein Securities analyst Bruno Monteyne. ”[Can] he weather this storm?

I didn’t think he would weather the last storm [when Tesco CEO Philip Clarke left]. But with a new CEO in place, you wouldn’t want the chairman to just be stepping down right away.”

I reported this morning that Broadbent says he hopes to be “part of the solution” at Tesco, not part of the problem.

But Reuters Breaking Views also questions whether Broadbent is the man to steer Tesco forwards. They reckon he’s in the last-chance saloon:

Tesco would be in an even bigger mess if Broadbent threw in the towel now. But will he be there in a year’s time?....

Video: Dave Lewis

Here’s a video clip of Dave Lewis discussing how Tesco managed to overstate its profit estimate for the six months to 23 August by £250m.

Lewis explains that he was alerted to the problem on Friday, and has now contacted the Financial Conduct Authority.

Updated

Tesco: mid-afternoon summary

A reminder of the state of play.

1) Britain’s largest retailer is reeling from the news that it has overstated its profit forecast for the first half of this year by an estimated £250m.

The scandal, which surfaced this morning, centres on discounts and promotional deals hammered out between Tesco and suppliers; who often pay for the chance to get their items well promoted across the supermarket chain’s stores.

Our latest news story: Tesco calls in investigators after overstating profit forecast

Tesco has now suspended four British-based executives. They are

2) The accounting error has plunged Tesco’s new CEO, Dave Lewis, into a crisis just three weeks after he joined the company. He has admitted that the £250m overstatement is an estimate.

3) Analysts continue to express shock over the latest problems at Tesco.

Crawford Spence, a professor of accounting at Warwick Business School, reckons Tesco’s management succumbed to temptation to play around with its numbers to cover up the full impact of falling sales.

Spence added that Tesco will probably be fined, but may avoid a court appearance over the issue. More here.

Portuguese bank Espírito Santo has claimed that Tesco’s profits in the UK could soon fall to zero.

While HSBC’s David McCarthy has warned that confidence in Tesco has been badly undermined; and fears the company may need a rescue rights issue.

McCarthy adds:

Rather than working on a repositioning, the CEO currently has another (major) fire to put out.

4) Tesco share price has slumped, to its lowest in over a decade, currently down 9.8% at 207p. That has wiped more than £1.5bn off its value.

The slump has cost Warren Buffett over £57m, I think.

5) PwC, Tesco’s auditors, are also in the spotlight. Particularly after it emerged that they had identified the “recognition of commercial income” as a key priority to get right, in the last annual report. (it’s not clear, though, whether PwC signed off the August 29 profit warning in which the overstated forecasts were made).

Our earlier mid-morning summary has full details of Tesco’s bruising conference call with the UK press pack, and early reaction.

The key points this morning were that

  • Tesco chairman Sir Richard Broadbent is refusing to resign...
  • ..and doesn’t know when the outgoing finance director was last in the office
  • Dave Lewis promised to conduct a full inquiry, and suggested that bonuses could potentially be clawed back from senior executives.
  • Lewis said the problem in Tesco’s 29th August profit warning was discovered last Friday. It means that Tesco’s profits in the first half of 2014-15 almost halved, to £850m from £1.6bn.
  • He also warned that Tesco needed to operate with integrity, a sign that something has gone badly wrong recently.

Updated

Warren Buffett take a hit on Tesco

Tesco’s crisis is also bad news for billionaire investor Warren Buffet.

Buffett’s Berkshire Hathaway is the third largest shareholder, with a 3.96% stake, so Tesco’s share price tumble (down 8.5%) has wiped around £57m off that holding, by my maths.

Buffett’s sold some shares last year, but in March his shareholding still worth £990m. Tesco’s shares have fallen substantially. At today’s share price, the stake is now worth around £675m.

Geir Lode, head of Hermes Global Equities, reckons the sight of Berkshire Hathaway on the shareholder register may have led other shareholders to be overly complacent.

“Some investors might have bought the shares having a perception of quality based on Warren Buffet’s ownership, but in this case the free cash flows and business stability are not there,”

Updated

HSBC: Tesco may need a 'rescue rights issue'

OK, we’ve now got hold of HSBC’s research note into Tesco, and it’s a corker.

David McCarthy, HSBC’s head of European Consumer Retail Research, warned that investing in Tesco is investing in the unknown and is a “high risk” activity at present.

McCarthy says:

The market is unsure what Tesco’s true level of profitability is, to what extent the new CEO may choose to rebase profits, and what today’s news will do to morale and the management team (4 senior executives have been suspended while the matter is investigated by external lawyers and accountants).

In short, confidence in Tesco has been undermined again, downwards momentum is accelerating, and it is unclear whether the real underlying level of profits has yet been found and to what extent the new CEO may choose to rebase profits.

Indeed, rather than working on a repositioning, the CEO currently has another (major) fire to put out. We remain Underweight.

McCarthy suspects that the accounting irregularities may be due to Tesco booking promotional rebates from suppliers based on historic precedent, even though current volumes have fallen (because shoppers are deserting to rivals such as Aldi and Lidl).

In short, we believe that Tesco’s gross margin has been falling rapidly and that this has been artificially hidden.

So how bad could it get? Well, McCarthy suspects Tesco could be forced to tap its shareholders for funds through a ‘rescue rights issue’.

Many issues remain unanswered and the possibility of a rescue rights issue should not be ignored.

HSBC has just cut its target price on Tesco’s shares from 195p to 175p (compared to 211p today), Reuters reports.

The FT’s Lex team have also been kicking the tires of the Tesco warning today.

They give this example of how supermarkets work today:

Lets say the supplier is, say, Lex’s Liverworst (LL).

1) LL ships Tesco some liverwurst at an agreed cost of £100m (Tesco takes delivery, does not pay).

2) Tesco sells the liverwurst for £110 over the next ywo weeks or so.

3) After 60 days or so, Tesco pays LL £90m not £100M and assures LL that it will be made whole eventually – we will ship more of your goods next month, or we will pay you a little more later, or lets just renogiate the price, or something.

4) If Tesco books the extra £10m in the current period, that is “accelerated commercial income” (as in: “Tesco has identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income.”)

5) But if it becomes clear that the supplier will have to be paid, that recognition of income will have to be reversed...

We’re collecting expert reaction to Tesco’s profit forecast overstatement here:

Tesco’s accounting error - what the analysts say

Observer food writer Jay Rayner has suggested that Tesco will respond to this crisis by tightening the screw on its supply chain:

Those Espírito Santo analysts also fear that Tesco could be an even trickier turnaround job than France’s Carrefour, which went through a tough restructuring a few years ago.

They say:

We think both companies are drastically different. In our view, Carrefour benefited from good prices but poor price clarity as well as a local food supply, limited transport costs and the benefit of franchisees. Tesco has higher transport costs and limited domestic food supply as well as no franchising model, alongside poor value for money and produce quality scores based on our proprietary surveys.

We think a turnaround at Tesco could take another 3-5 years.

Espírito Santo: Tesco's UK profits could fall to zero

Analysts at Portuguese bank Espírito Santo have a dire warning for Tesco - they reckon its UK arm could eventually stop being profitable at all.

They cut their price target on Tesco to 165p from 190p (compared to 211p now), and predicted that profits this year will almost halve:

We believe most of the accounting issues will centre on UK profitability. As a result, we expect UK profits to be down 48% in 2014/15 implying a UK margin of 2.7%.

With some prices 38% more expensive (ESIB estimate) than Aldi, questionable pricing architecture and higher levels of salt and sugar in some fresh products alongside an ailing non-food business, we believe that Tesco could eventually generate zero profits in the UK – the extent of the risks to us remain large and uncertain.

Updated

The cost of insuring Tesco’s bonds against default has risen, according to data firm Markit which tracks credit default swaps:

That means it would cost £107,000 per year to insure £10m of Tesco bonds.

So a default is seen as rather unlikely. Just less unlikely than on Friday.

Warwick Business School Professor: Tesco likely to be fined

How bad could this get for Tesco?

Crawford Spence, a professor of accounting at Warwick Business School, reckons the company will face a fine, but probably avoid ending up in court.

“Given it this has been flagged up and dealt with internally it is unlikely any court proceedings will occur. Tesco could be fined by the authorities, but they will most likely wait to hear what the auditors, Deloitte, uncover first.”

Spence also dubs it a “a classic ‘earnings management’ issue”.

Firms quite legitimately play around with their revenue and expenses all the time. However, when they do so aggressively, as Tesco appear to have done, this is usually because the firm is under pressure elsewhere.

In Tesco’s case, it has been losing market share to its competitors steadily in recent years and losing value quite dramatically in its share price in recent months. Rather than fix the underlying problems, they have been playing around with their numbers to try to make things look better.

Tesco CEO Dave Lewis has admitted that the £250m profit overstatement is only an estimate at this stage; it could be more.

Speaking to the BBC, Lewis also faced more tough questions over whether Tesco’s finance office is running properly, as we don’t even know when outgoing CFO Lawrie McIlwee was last at his desk (see 9.17am)

Updated

Retail analyst Steve Dresser, who has good connections in the supermarket sector, is tweeting some interesting info from Tesco insiders:

Here are the four executives who have 'stepped aside' at Tesco

We have now confirmed the identities of the four senior executives who have been put on leave at Tesco.

They are:

Hat-tip to my colleague Zoe Wood.

Updated

The FT’s Alphaville team (always invaluable) are examining the situation at Tesco in their Markets Live webchat.

Here’s a flavour, quoting analyst Terry Smith:

This quote from the Tesco chairman is causing a stir:

Tesco drags FTSE down

It’s not been a great morning for shares in the City.

Tesco’s sliding share price has helped to send the FTSE 100 index of blue-chip companies down 56 points, or 0.8%.

While Tesco is the biggest faller, many mining companies are under pressure too.

Concern is swirling grows that China’s economy is slowing faster than thought. That has hit commodities such as iron ore, a key stable for China’s factories.

Shares in Tesco’s rivals are down today, as my colleague Nick Fletcher explains:

Meanwhile Tesco’s woes seem to have hit the rest of the sector, with J Sainsbury down 9.1p at 275.2p and Morrisons 4.5p lower at 177.5p

Nick’s market report has all the details.

FTSE 100 falls back on Tesco shock and slump in mining shares on China fears

Updated

Tesco’s auditors, PwC, are certain to face tough questions over their performance.

They were aware that payments from suppliers needed to be handled responsibly. The proof lies in Tesco’s annual report (pdf), where they state that the “recognition of commercial income” was a top priority for them.

As Mark Gill, senior statutory auditor at PwC, put it:

We focused on this area because of the judgement required in accounting for the commercial income deals and the risk of manipulation of these balances.

Indeed....

Here’s the relevant section:

So what went wrong?

As Oliver Ralph of the Financial Times’s Lex column puts it:

If everyone has been looking so hard at commercial income, how has the company still managed to make a mess of it?

Chris Choi adds that a can of (finest?) worms has now been opened.....

Chris Choi, ITV’s News’s consumer editor, is alarmed that Tesco was even in a position to book revenue from its suppliers for promotional activity.

Reuters Breakingviews also reckon Richard Broadbent’s days as Tesco chairman may be numbered:

Updated

£1.5bn knocked off Tesco's value

Tesco’s shares had been pretty stable this month, as City investors watched to see how Dave Lewis performed.

But today’s 8% tumble has wiped around £1.5bn off its market value, from £18.8bn to around £17.3bn right now.

Tesco: Execs suspended, chairman under pressure, shares hammered

Here’s a summary of the latest crisis to engulf Tesco, after three and a half dramatic hours.

1) Tesco has suspended four senior executives after discovering that it had overstated its profit forecast for the first half of this financial year by £250m.

The company confirmed that Robin Terrell, its multi-channel director, is now leading its UK operations. Chris Bush is understood to be one of the four execs who have stepped aside.

Sky News is also reporting that UK finance director Carl Rogberg has been suspended.

2) Tesco will not say exactly how it overstated its profit forecasts (in a trading update/profit warning on August 29).

But the problem appear to centre on the way it booked various revenue and costs from its suppliers, including promotional activity (ie, paying to get a product a good position in Tesco’s stores)

Some income has been booked in the wrong time period, meaning that Tesco’s profit forecasts for the first half of the 2014-25 financial year were artificially inflated by £250m -- to £1.1bn

CEO Dave Lewis, who joined from Unilever three weeks ago, told reporters on a conference call that he had not seen anything of this kind previously in his career.

He insisted that he didn’t feel “misled” when he took the job, though.

3) Lewis also insisted that it is “business as usual” for Tesco’s army of workers around the globe.

4) Asked whether executive bonuses could be clawed back, Tesco’s management pledged to take ‘all necessary action’ once the inquiry is complete.

5) Tesco revealed that the problems in the accounts were discovered last Friday, when an “internal alarm” went off.

One unnamed employee contacted Tesco’s general counsel, triggering today’s announcement, and the decision to ask Deloitte to investigate.

6) Chairman Sir Richard Broadbent says he is not resigning, telling reporters that he wants to be “part of the solution” at Tesco.

But Broadbent was unable to say when outgoing finance director Lawrie McIlwee was last in the office, raising questions over how Tesco’s financial operations have been run since McIlwee resigned in April.

7) Broadbent told reporters that he is “exploring all possibilities” regarding whether McIlwee’s successor, Alan Stewart, can be fast-tracked out of his gardening leave at M&S.

Stewart is not due to swap his trowel for a calculator until the end of November.

8) Tesco’s share price remains at its lowest level in a decade, having slumped 8% to 210p this morning.

9) City analysts remain aghast over the developments.

A “flabbergasted” Clive Black of Shore Capital argued that chairman Broadbent may have to go.

This development may raise, indeed must raise, much more fundamental questions over the Chairman’s position and the nature, composition and extent of the Board

Cantor Fitzgerald, though, is not surprised - it raised concerns over Tesco’s reporting practices last year. Broadbent declined to comment on this today.

Updated

Tesco CEO: It's business as usual

Dave Lewis concludes the media conference call by insisting that Tesco’s turnaround won’t be deflected by this inquiry.

He tells reporters that he has tried to give as much information as he can today on the accounting problems, and promises to pursue that investigation to its ultimate conclusion.

Lewis then says:

When we have got to the bottom of what has happened, we will share it with you and the investment community. This is a huge thing, but it is only one of two things I will focus on.

For us it’s business as usual. Around the world we will be focused on giving better service.....

This investigation will have no impact on the determination of half a million people to give better service to customers.

And that’s the end of the call (highlights start here). Summary to follow.....

Updated

How long will the inquiry take?

Lewis won’t say, but promises to share what we know at Tesco’s interim results in October.

Shouldn’t your auditors have picked up this unusual accounting practices?

Dave Lewis declines to reach any conclusions until the investigation is complete.

When was Laurie McIlwee, Tesco’s outgoing finance director, last in the office?

Broadbent doesn’t have that information to hand.

Roughly, Sir Richard?

It’s not sensible to guess when he was last in the office, Broadbent insists.

(McIlwee resigned in April, but his successor Alan Stewart won’t start until December)

Why is Tesco receiving income from its suppliers at all? Shouldn’t it simply be paying them for their goods?

Once again, Lewis declined to give details, but he cited issues such as “promotional support”

Has Dave Lewis seen this kind of misreporting before?

He has not.

Is this a one-off issue, or deeper?

Lewis won’t say at this stage

Tesco confirms Robin Terrell is now running UK operations

Can Tesco confirm that Robin Terrell has taken over as UK managing director?

Robin will be running and leading the UK leadership team, Lewis replies.

So you are confirming that Chris Bush has been suspended?

Lewis declines, saying he doesn’t want to identify individuals.

Dave Lewis declines to comment on Cantor Fitzgerald’s claim that Tesco has been overstating its gross profits by £200m per year (see 9.02am post for details)

Was Tesco’s board operating properly, given ex-CEO Phil Clarke had been effectively sacked and the company’s finance director had resigned?

Chairman Broadbent insists that Phil Clarke was fully engaged.

So what exactly went wrong in Tesco’s profit forecasts?

Tesco CEO Dave Lewis explains that the problem centres on the way Tesco reports the income it receives, versus when the activity took place.

Some activity has been billed in the wrong time period, he says.

Tesco chairman not resigning over profit overstating.

Shareholders are voting with their feet this morning, so shouldn’t chairman Richard Broadbent resign?

Broadbent replies that “I always listen to shareholders”

But I am conscious that when a company goes through tough times, everyone must decide whether the board are addressing the issues or ducking the issue.

You, and the shareholders, must decide whether I am part of the solution or part of the problem.

I want to be part of the solution, Broadbent insists.

What time period will the investigation cover?

It will cover the commercial income for Tesco.

For how long?

It looks to be substantially in the first half of this year, and that’s where we will start, Lewis replies.

Who is the Tesco finance director, and why isn’t Lawrie McIlwee, the outgoing FD, on the call?

(McIlwee’s replacement, Alan Stewart, is still serving his gardening leave from M&S).

Broadbent says that McIlwee isn’t on the call because he wasn’t in the office on Friday when the problems came to light.

Just because we do not have a finance director in the office every day does not mean that the finance director’s responsibilities are not being fulfilled, Richard Broadbent insists.

Dave Lewis won’t confirm that Chris Bush, UK managing director, has been suspended. Not prepared to discuss individuals today.

Does Dave Lewis feel he was misled?

No, not at all. What has happened is totally out of the ordinary.

Next question is for chairman Richard Broadbent - will you resign, or is your position under threat?

Broadbent will not be resigning.

He says the Tesco board has a plan in place, and had appointed a CEO with the right skills to take the company forward.

We will handle this issue with integrity, he insists. You must decide if we have achieved that, once it is concluded

So he’s not quitting.

Q: Is Phil Clarke (former CEO) still on the payroll, and could bonuses be clawed back?

Yes, Clarke is still being paid.

We will take all necessary action once the investigation is underway, Richard Broadbent replies.

Updated

Tesco media call

Tesco is now fielding questions from the media - I’m dialled in.

First question - how did this profit overstating come to light?

An informed employee raised concerns to our general counsel, Dave Lewis says.

Updated

Just joining us? Get up to speed with our news story on the unfolding crisis at Tesco.

Tesco calls in investigators after overstating profit forecast

More speculation about the Tesco chairman’s future (as flagged up earlier)

Cantor: Dave Lewis may have had suspicions already....

City firm Cantor Fitzgerald reckon that Tesco’s CEO Dave Lewis may have had suspicions about accounting practices even before he joined the company last month.

Lewis was lured from Unilever; one of Tesco’s major suppliers.

Cantor say:

We suspect Dave Lewis was aware of Tesco’s actions while at Unilever and from comments across the UK/Global supplier base so we expect he already had several questions for Tesco’s commercial team when he joined.

Cantor has been raising concerns over Tesco’s accounting practices for some time.

Back in late 2013, they argued that Tesco had been over-stating its UK commercial gross profit by £200m+ per year, by deducting monies from suppliers’ trading accounts or extending payment dates without notice.

Updated

Robin Terrell, the head of Tesco’s online operations, is taking over Chris Bush’s role as UK managing director on a temporary basis, we believe.

Terrell joined Tesco from House of Fraser last year, and also used to run John Lewis’s online arm.

Tesco insiders have confirmed to us that Chris Bush, the managing director of the company’s UK stores, is one of the senior executives suspended while the inquiry takes place.

Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers, says that Dave Lewis’s “baptism of fire” continues.

Whilst this does not come close to jeopardising overall profitability, it follows last month’s announcement when the market had assumed that, at least, the bad news was out in the open and being dealt with.

Prior to today’s precipitous drop, the shares had fallen 39% over the last year, and 21% in the last three months alone.

After that initial slump, Tesco’s shares have recovered slightly but are still down over 8% this morning.

And that’s the end of the Tesco analyst call. But Dave Lewis and chairman Richard Broadbent can’t relax -- there’s a media call in 25 minutes.

An “internal alarm bell” went off at Tesco last week, Dave Lewis reveals, triggering this morning’s admission that profit forecasts had been overstated by £250m.

Tesco CEO: We will find out if any rules were broken

CEO Dave Lewis has promised that the investigation will uncover whether staff have broken any rules.

Tesco’s usual auditors are PricewaterhouseCoopers.

Tesco CEO Dave Lewis confirms that the problem was discovered on Friday.

Tesco: Several staff have 'stepped aside' while investigation takes place

Tesco is now feeling the wrath of analysts, on a conference call.

CEO Dave Lewis has revealed that “a number of people” have been suspended from duty while the investigation is underway. That includes four senior executives.

And Sir Richard Broadbent, the chairman, is taking a lot of criticism.

My colleague Sean Farrell is on the call:

Tesco’s share price over the last couple of years is not a pretty sight:

Updated

Tesco share price has hit a low of 202.5p, which I reckon is the lowest level since May 2003.

Tesco shares tumble 11%

Shares in Tesco have fallen by 11%, as traders punish the company for its admission that it has overstated its profit forecasts by £250m.

Sky’s News’s Mark Kleinman reports that an “unnamed” Tesco director flagged up concerns about the company’s profit forecasts on Friday, triggering this morning’s shock admission.

Shore Capital: Questions about Tesco chairman's position

This is simply not how “well operated FTSE 100” companies operate, says Clive Black, Shore Capital Stockbrokers.

Black has laid into Tesco, and pinned the blame firmly on the chairman, Sir Richard Broadbent. His position is now at risk, he suggests.

Clearly there can be no suggestion of impropriety on behalf of the new CEO to our minds, who has been in the job less than a month.

However, this development may raise, indeed must raise, much more fundamental questions over the Chairman’s position and the nature, composition and extent of the Board, which to our minds has been lop-sided between executives and NEDs [non-executive directors] for far too long; such matters, of course, are for shareholders to decide.

These are serious times for Tesco and its shareholders, Black adds.

We are flabbergasted by this development and have no choice but to put our HOLD stance, which we only went up to through Mr. Lewis’ appointment, UNDER REVIEW.

We expect the market to respond in a penal manner on the Tesco’s shares upon opening, we’ll monitor with interest how the dust settles.

Traders are predicting that Tesco’s shares will take a fearsome hammering when the London stock market opens....

Nick Bubb, retail analyst, says Tesco’s announcement “will go down like a lead-balloon in the City”.

One remarkable aspect of this story is that Tesco has overstated its profit forecasts by £250m in a profit warning.

That August 29 statement (online here) was pretty brief, so it’s not immediately clear exactly how Tesco managed to overstate its income and underplay its cost forecasts so badly.

Leisure analyst Mark Brumby is also alarmed:

Summary

City analysts are amazed, and shaking their heads in disbelief at the news that Tesco has overstated its profit forecast by a quarter of a billion pounds.

Here’s some instant reaction:

Updated

Tesco CEO: We must operate with integrity and transparency

Tesco’s new CEO, Dave Lewis, isn’t pulling any punches in today’s shock statement, saying:

“We have uncovered a serious issue and have responded accordingly. The Chairman and I have acted quickly to establish a comprehensive independent investigation.

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.”

This can’t be what Lewis expected two months ago, when he agreed to take on the tast of turning Tesco around.

Tesco rocks City with profit warning

Good morning, and welcome to our rolling coverage of the financial markets, the world economy, business and finance.

Some breaking news is shaking the City this morning. Tesco has just announced that it has overstated its profit forecasts for the first half of this year, by a jaw-dropping £250m.

In a surprise announcement, Tesco’s new chief executive Dave Lewis warned that a “serious issue” has been uncovered in the company’s most recent profit warning, released a month ago.

According to Lewis, those results - released on - 29 August - were flawed because they “accelerated” the recognition of commercial income but “delayed” the accrual of costs.

That means that Tesco’s estimate of £1.1bn profits in the six months to 23 August was unduly optimistic; it should actually have been closer to £850m, or around half the previous year.

It’s a remarkable admission from one of Britain’s biggest companies, which has already issued three profit warnings this year as it struggles to shore up its market share.

Lewis, who only joined from Unilever at the start of September, has now called in Deloitte to examine the situation.

Here’s the full statement:

TRADING UPDATE

Reaction to follow, along with other breaking news through the day....

Updated

 

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