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Tesco issues profit warning and cuts dividend

Tesco has issued another profit warning and is to slash its dividend by 75pc as trading worsens for Britain’s biggest retailer.

The shock announcement is Tesco’s second profit warning in two months and follows the ousting of Philip Clarke as chief executive last month.

In a sign of the urgency of the situation, Dave Lewis, Mr Clarke’s replacement as chief executive, will now start on Monday, a month earlier than planned.

Sir Richard Broadbent, chairman of Tesco, said the financial performance of the company had been hit by a “combination of challenging trading conditions and ongoing investment in our customer offer”.

He said the decision to cut the dividend had “not been taken lightly”.

Tesco shares opened down 8.75pc, dragging down the rest of the retailer sector. Sainsburys fell 5.2, Morrisons dropped 4.7pc and Marks and Spencer slid 2.6pc.

Figures from Kantar Worldpanel earlier this week showed that Tesco sales were down 4pc in the last 12 weeks, the worst performance in the industry.

Tesco is now forecasting that trading profits for the six months to August 23 will be £1.1bn, with annual profits of between £2.4bn and £2.5bn. Last year, interim profits were £1.6bn and full-year were £3.3bn.

Shares in Tesco are down by a third in 2014 as the City has speculated that the divided will be cut. However, the reduction in the shareholder payout is even more drastic than most feared.
Sir Richard said that Tesco will reduce the interim dividend by 75pc to 1.16pc per share. He said the board “is focused on maintaining a strong financial position in order to maximise its business and strategic optionality”.

Tesco will also slow Mr Clarke’s store revamp programme in order to save cash. This means capital expenditure will be £2.1bn, down from the expected £2.5bn. The retailer will also invest less into IT.
"The board’s priority is to improve the performance of the group,” Sir Richard said,
“We have taken prudent and decisive action solely to that end. Our new chief executive, Dave Lewis, will now be joining the business on Monday and will be reviewing every aspect of the group’s operations.

“This will include consideration of all options that create value for customers and shareholders.

“The actions announced today regarding capital expenditure and, in particular, dividends have not been taken lightly. They are considered steps which enable us to retain a strong financial position and strategic optionality."

Clive Black, analyst at Shore Capital, said "wholesale changes" are required at Tesco.

He added: "It is very disappointing to see this update, which fundamentally raises questions in our minds about the capability of the management under Mr Clarke at this once great company.

"As such, we expect, as part of a range of measures, there to be considerable senior management change under Mr Lewis in time, as Tesco needs a world class top team to take it forward.

"We can speculate but not predict Mr Lewis' priorities. As such, we should also respect the fact that he needs time to assess matters and manage the business.

"Hence, whilst this update is unhelpful, it does not adjust our view that Tesco UK needs fundamentally better management and that this is a group where the pint can still be more than half full. ‎

"In time Mr Lewis may also have views on the make-up of Tesco but stemming the tide of decline in the core has to be the priority."

Source : Graham Ruddick - The Telegraph

29 August 2014

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