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Tesco Starts Accounting Probe After Profit Forecast Overs

Tesco

Tesco Plc (TSCO) started a probe into its accounting practices after the U.K.’s biggest grocer overstated profit guidance for the first half, the latest setback as it struggles with falling profit and management changes.

Expected profit was overstated by about 250 million pounds ($408 million) due to an accelerated recognition of commercial income and delayed accrual of costs, Cheshunt, England-based Tesco said today. The company had previously said operating profit for the period would be about 1.1 billion pounds.

“We have uncovered a serious issue and have responded accordingly,” said Chief Executive Officer Dave Lewis, who took the post this month, in the statement. “We will take decisive action as the results of the investigation become clear.” The company will report interim results on Oct. 23, it added.

Lewis succeeded Phil Clarke, who was ousted in July after his three years leading the company failed to stem the loss of market share to discounters and upscale chains. Tesco stock has lost 31 percent of its value so far this year, on track for its fifth straight annual decline.

“It was evident to many that there was a lot of kitchensinking coming and we had seen that the accounts were overstretched,” said Bruno Monteyne, an analyst at Sanford C. Bernstein and a former Tesco executive. “To David Lewis’ credit, he is again on the front foot, tackling the issues head on. It raises serious questions though for the board and Phil Clarke.”

Clarke’s Efforts

Under Clarke, the company spent more than 1 billion pounds to remake stores, adding children’s playgrounds, artisan bakeries and Zumba dance classes to lure back customers. Clarke also spent on technology products such as tablets and building the company’s online media.

Instead, Tesco had its worst sales decline in more than two decades, when revenue dropped 4 percent in the 12 weeks to Aug. 17, and market share fell 1.4 percentage points to 28.8 percent, Kantar Worldpanel data showed. Meanwhile, Aldi and Lidl have maintained their record shares of 4.8 percent and 3.6 percent, respectively, thanks to the half of U.K. households who shopped at either outlet.

(Source: Bloomberg)