Profit shock not the best start for Tesco boss Dave Lewis

Companies the size of Tesco regularly churn out huge numbers. It has half a million staff in almost 7,000 stores across the world helping customers make over 75 million shopping trips every week.

But today a new, eye-watering statistic: its profits for the first half of the year will be £250 million lower than the £1.1 billion it told investors only a few weeks ago to expect. In other words, it got its sums wrong by almost a quarter.

Shareholders took the news very badly and, for many, it’s the final straw after a long period of turmoil at the retailer.

Marc Kimsey, senior trader at Accendo Markets, commented this morning: "Tesco is no longer a viable investment.The last two years have tested investors' patience, but with the dividend being cut back and today's revelation, justification to hold [shares in Tesco] is non-existent.”

Shares in the company have closed down more than 10% after even bigger falls earlier today. So what on earth has gone wrong?

On a call with journalists this morning, the new chief executive of Tesco, Dave Lewis, explained that an employee brought concerns about the way profits were being calculated to the attention of the company’s in-house lawyer on Friday.

Preliminary investigations over the weekend have led Mr Lewis to suspend four executives (including, we are led to believe, the head of the UK business) and to commission an inquiry by Tesco’s lawyers and accountants.

At issue is the relationship Tesco has with its suppliers.

Although he wouldn’t confirm exactly what’s gone wrong, Mr Lewis says it appears income from suppliers has been reported in the wrong accounting period to when the activity took place. These are "promotional elements and other contractional payments … joint business plans”, he says.

We know that Tesco uses its size to secure rebates in various ways from suppliers. It appears the company has brought forward rebates, or something like them, to flatter the sums it presented for the first half of its trading year – perhaps at the expense of results later in the year.

What was the exact process? Who approved it? Did it go on for longer than six months? What auditing controls does this vast company have over its individual business? We are promised answers when Tesco next presents interim results on October 23.

What struck me as odd was a comment from the chairman of Tesco, Sir Richard Broadbent, who said that the relationship with suppliers – specifically the ‘commercial income’ like rebates that Tesco receives – had received "attention of some vigour” from the company’s audit committee over the past six to nine months. And yet it appears very significant sums were still missed.

If it transpires that the company deliberately falsified accounts, this is serious stuff.

You might think it’s a dreadful start for Dave Lewis, who only joined from Unilever at the start of this month. His attention will have to be focussed on an apparent crisis at the heart of the retailer.

But it does provide him with a chance to shake up the management team he inherited, to flush out any other issues he finds and to present himself as the new broom, ready to sweep Tesco back into contention against the discounter rivals like Aldi and Lidl.