In an unscheduled update, CEO Dave Lewis warns trading profits for the year to February 'will not exceed £1.4 billion' as a result of investment in price cutting and changes to commercial income activities following the fall-out from a £263 million profits overstatement, currently being looked at by the Serious Fraud Office.
Sara-Louise Boyes at Jefferies, with a 'hold' rating and 195p price target, says 'a circa 30% cut to 14/15 profit expectations is implied by today's guidance for trading profit of not more than £1.4bn. The downgrade comes from UK retail, where we now model a second half trading loss of £118m (i.e. a 544 basis point year on year margin swing). The net impact is a FY 14/15 EBIT margin of 0.9% for Tesco UK retail (making it the least profitable grocer of scale globally). We have cut our earnings estimates by 34%/22%/17% respectively for the current year and the following two.'
Nicla Di Palma, equity analyst at Brewin Dolphin, comments: 'There are several reasons for the reduced profit target, firstly, the change in supplier income recognition and secondly that Tesco is investing more aggressively in service (it added more than 6,000 new employees in store) and price (what Mr Lewis called "selective price investment"). Management did not exclude further price investment as the year progresses.'
She continues: 'We expect the final dividend to be cancelled and we await to hear more information about how Mr Lewis plans to improve Tesco. We also hope management will be able to sell some of its non-core assets and will be brave enough to close underperforming stores.'