Markets react to Tesco's overstated profit

Tesco’s problems appear to be getting worse as the food retailer issues another profits warning.

A Tesco branch
Source: Bloomberg

The writing was on the wall following last month’s decision to bring Dave Lewis into the CEO role a month ahead of his start date. Today’s revelation that the company has overstated its first-half pre-tax profits by £250 million has seen the markets react aggressively.

When faced with uncertainty markets tend to factor in a worst-case scenario, but the £250 million accounting error has seen the share price fall significantly, knocking £1.5 billion off the company’s market capitalisation. Given that the Tesco chairman has stated he can’t be sure that this is the limit to the company’s overstatement, it is no wonder the markets have moved from worry to panic over the way management has been running the business.

Although today’s revelation is a historical one, any hope that the arrival of ex-Unilever man Dave Lewis would result in a swift return to form have been quashed this morning. Questions are now being asked of Sir Richard Broadbent, who has over seen the transition of departed CFO Lawrie Mcllwee who left the company in April. His replacement, Alan Stewart, is still tied up with gardening leave until November following his acquisition from M&S. It will be interesting to see how steep the compensation is, or how helpful M&S will be in aiding Tesco.

Tesco has led the FTSE fallers this morning and over the last twelve months has dropped by 46%. In 9 of the last 12 months the shares have fallen and confidence in the company, and more specifically the management, has been tested. Although the shares are oversold, the confusion that still reigns over the food retailer should see the negative market sentiment maintained for some time to come. Today’s lows of 203p looks unlikely to be the limit of where the shares will trade in the coming days.

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