Tesco cut profit expectations for the fourth time in five months on Tuesday as the cost of rebuilding after an accounting scandal and a dramatic loss of market share increased pressure on the British grocer and its new boss.
Shares in the world's third-biggest retailer plunged as much as 17 percent to a 14-year low, wiping at one point over 2.5 billion pounds ($3.9 billion) off its stock market valuation, as the group cut its full-year trading profit forecast by nearly a third.
Continue Reading Below
After two decades of uninterrupted growth, Tesco lost its way. Distracted with a costly expansion abroad it was slow to respond to the rise of discounters, convenience stores and online shopping in its home market that hit its reliance on huge out-of-town sites.
Chief Executive Dave Lewis, who joined to rescue Britain's largest grocer in September, said the slashed guidance reflected new accounting policies and procedures following the recent scandal and investment in stores, staff and lower prices.
"The combination of all those things gets you to an investment which is a little bit north of 500 million pounds," Lewis told reporters.
Tesco said it now expected group trading profit for its 2014-15 year not to exceed 1.4 billion pounds, compared with analysts' average forecasts of 1.94 billion pounds, dealing another blow to the reputation of the 95-year-old firm.
The new forecast also compares to the 3.8 billion pounds Tesco recorded in the 2011-12 year.
Having slashed its first-half dividend by 75 percent, shareholders fear they may not get anything at the year end.
"Given what you've seen today it wouldn't be surprising if the final was nil," said one large Tesco investor.
Its problems were compounded in September when Lewis reported the company had overstated expected first-half profits by 250 million pounds -- a figure later raised to 263 million pounds.
"DIVING FOR THE LINE"
Bernstein analyst Bruno Monteyne, a former senior Tesco supply chain executive, said most commentators had assumed Tesco's profits would hit the trough in the next financial year, but that the "account cleansing" and higher investment had been brought forward.
Monteyne said the group had previously been known for "diving for the line" where it would reduce stock and staff towards the end of the year to meet its financial numbers.
"We've taken the decision that that's not what we want to do," said Lewis, in reference to the practice.
Lewis said he has taken steps in recent weeks to help Tesco's customers by recruiting an additional 6,000 store staff, increasing availability on the 1,000 most popular lines and lowering prices on those products, as well as Christmas items.
Industry data published last month showed Tesco's UK sales, which account for two thirds of group revenues, falling at a greater rate than any of its main rivals -- Asda, Sainsbury's and Morrisons -- as it continues to lose market share to German discounters Aldi and Lidl.
Cantor Fitzgerald analyst Mike Dennis said he was penciling in just 15 million pounds of UK trading profit for Tesco's second half, down 98.6 percent.
Lewis said he would provide more detail about the measures he plans to take to improve Tesco's trading and strengthen its balance sheet in a Christmas trading update on Jan. 8.
"Our priorities remain restoring competitiveness in the UK, protecting and strengthening the balance sheet and rebuilding trust and transparency," said Lewis.
At 1148 GMT, Tesco shares were down 10 percent at 169 pence, after touching a low of 155.4 pence. Shares in rivals Morrisons and Sainsbury's were down 4.5 percent and 3.5 percent respectively on fears Tesco's investments would increase competition.
Tesco's stock has lost about 52 percent of its value over the last year, compared with a rise of about 1 percent in Britain's bluechip FTSE-100 index.
"While most investors are focusing heavily on the bad news, uncertainty and panic can create exceptional opportunities for long-term value investors like us," said Ian Kelly, a European Equities fund manager at Schroders.
Schroders is the eighth-biggest shareholder in Tesco with a 1.67 percent stake.
The accounting scandal, relating to how Tesco books supplier payments, led to the suspension of eight senior members of staff, including UK managing director Chris Bush, and sparked a series of investigations, including by Britain's Serious Fraud Officer and possible investor lawsuits in Britain and the United States. ($1 = 0.6390 pounds) (Additional reporting by Sarah Young, Li-mei Hoang, Neil Maidment and Simon Jessop; Editing by Mark Potter and Anna Willard)
Continue Reading Below