Should You Buy Tesco PLC After £250m Profit Shortfall Blamed On Individuals?

tesco2Press reports over the weekend suggest that Tesco (LSE: TSCO) has completed its review of the circumstances leading to its £250m profit shortfall — and is pinning the blame on a handful of individuals, rather than systematic dodgy accounting.

According to the reports, it is thought that a number of individuals “deliberately” misled the firm’s auditors by booking bonus payments from suppliers that Tesco had failed to qualify for — and offering incentives to those suppliers to persuade them to allow Tesco to keep the money.

It appears that the problems were restricted to the first half of this year and will not result in a restatement of previous years’ profits.

Good news or bad?

Although this appears to be relatively good news, it does raise some questions.

I suspect that it’s not a coincidence that these problems arose during a period when Tesco lacked an effective board: both the chief executive and finance director were serving notice periods.

Both have now been replaced, so a recurrence of this sort of problem seems unlikely, but it should never have been able to happen — and makes me wonder what else may have been going wrong at Tesco during the same period.

How will profits be affected?

According to the weekend’s press reports, it appears that Tesco’s restated first-half trading profits will be around £850m, in-line with its original statement to investors, and around £250m lower than the firm’s original £1.1bn forecast.

This equates to a 46% fall in first-half profits since last year, when the firm reported trading profit of £1,588m for the first six months of the year.

My calculations suggest that trading profit of £850m could equate to first-half earnings per share of around 6.8p.

Assuming that performance will be better during the second half of the year, which includes Christmas, then we could be looking at full-year earnings of around 15p per share — although it’s worth noting that current market forecasts are higher, at around 19p per share.

Buy Tesco now?

Should you buy Tesco shares ahead of Thursday’s delayed results announcement? I’m not sure it’s worth the risk.

New CEO Dave Lewis has not yet revealed any information about his planned strategy for the firm, and we don’t yet know just how weak Tesco’s finances are.

I suspect there will be more buying opportunities over the next few months, especially if, as rumoured, Tesco is forced to hold a rights issue to strengthen its balance sheet.

Buying shares in distressed companies like Tesco can result in above-average returns, but it does carry extra risk.

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Roland Head owns shares in Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.