I didn’t expect my grim outlook to become reality quite so quickly, but Tesco’s shares slid on Monday after the firm revealed that it had overstated its first-half profit guidance by an estimated £250m, and look where we are today — under 200p.
Essentially, what appears to have happened is that Tesco recognised income too soon, and costs too late, flattering its profit forecast for the first half.
How bad is it?
I’ve no idea of how deep Tesco’s accounting problems might run: frankly, I’m not sure anyone does.
Tesco’s new chief executive, Dave Lewis, said that despite nearly three decades of retail experience (at Unilever) he has never seen anything like this before. The supermarket has even had to parachute in new CFO Alan Stewart over two months early, joining today rather than 1 December.
So far, the problem appears to be restricted to the first half of this year, a period when the firm’s senior management, under newly departed CEO Philip Clarke, would have been under intense pressure to report decent trading.
However, we’ll have to wait until next month to find out whether these problems could affect previous years’ results.
Is Tesco doomed?
City analysts plunged into full-scale doom mode following Tesco’s announcement:
Analysts at Espirito Santo suggested that “Tesco could eventually generate zero profits in the UK”.
Over at HSBC, the bank’s head of European Consumer Retail Research, David McCarthy, said “we believe that Tesco’s gross margin has been falling rapidly and that this has been artificially hidden”.
Time to buy?
However, it’s important to keep a sense of perspective: Tesco is still a large, important business that’s expected to report a trading profit of around £850m for the first half of this year.
What’s more, today’s bad news gives Mr Lewis the perfect opportunity to do a ‘kitchen sink job’, and release as much bad news as possible when the firm’s delayed first-half results are published on 23 October, before unveiling his turnaround plan.
In my view, now might be the ideal time to buy Tesco shares, if you can live with the uncertainty regarding the firm’s accounting problems.
A more prudent approach would be to wait until the supermarket’s half-year figures are published on October 23.
Depending on the news that day, I expect to see the firm’s share price lurch higher — or perhaps lower — as the market digests Tesco’s first-half profits and full-year outlook.
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Roland Head owns shares in Tesco, Unilever and HSBC Holdings. The Motley Fool UK owns shares of Tesco and Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.