Tesco horror show continues

Half-year results from Tesco were predictably bad, but a lack of fresh ideas has angered investors and the share price is back near that 11-year low. In fact, visibility has only deteriorated further, profits plunged by 92% and we're warned that full-year profits may be worse than feared. Chairman Sir Richard Broadbent will leave once management comes up with a plan.

"Once this transition is complete and business plans are in place, it will mark the beginning of a new phase for the company and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time," said Broadbent. "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."

Well, it's still unclear what that is. But that's something we acknowledged recently. A new strategy was unlikely on results day, given that both new chief executive Dave Lewis and finance boss Alan Stewart only arrived a few weeks ago.

Tesco said it will not update the market again until its Christmas and third quarter trading statement on 8 January. Lewis did, at least, outline his focus, although this is all obvious stuff.

He said: "Whilst my review of the whole business continues, three immediate priorities are clear: to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand."

That's a big job, and will not happen overnight. Indeed, the investigation by Deloitte into the suspected £250 million overstatement of profits has concluded and found that the accounting black hole was in fact £263 million. That wiped £118 million off first-half underlying operating profit, with the rest attributed to previous years. The Financial Conduct Authority (FCA) probe is ongoing.

Tesco made £937 million in the six months to 23 August, down 41% but more than expected, driven by a profits beat in the UK of £499 million. However, include numerous one-off charges and pre-tax profit plunged from £1.4 billion to just £112 million. And while a 5.4% decline in UK like-for-like sales was in line with forecasts, Europe and Asia were a big disappointment.

"We are reviewing all opportunities that exist within the group to generate value and create headroom," said Broadbent. "Full-year profitability could therefore be further impacted by actions we choose to take."

"As such, there are a number of uncertainties which limit visibility of future performance. We will do the right thing for customers - and therefore the business - despite these uncertainties. For these reasons we are not providing full year profit guidance."

Deutsche Bank has cut estimates for the second-half and for the full-year. The broker now expects full-year UK profit of £814 million, 23% less than previous estimates, and 13% less in Asia, driving annual group profit down 45% to £1.8 billion. In 2011, it was almost £4 billion. Expect full-year adjusted earnings per share (EPS) of 15.15p and about the same in 2015, says Deutsche.

At 174p, Tesco shares trade on 11.5 times forward earnings. That’s expensive given the ongoing price war will likely continue to crush UK margins, and without any guidance either on profits, or strategy. Much will be expected from the January statement. Until then, it’s difficult to see any positive catalysts.

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