The supermarket has issued its fourth profit warning this year and has stated that it’s trading profit for the full financial year “will not exceed £1.4bn”, compared to the £1.8bn to £2.2bn expected.
These results have triggered a 14% fall in Tesco’s share price in opening trade on Tuesday to 161p.
The supermarket said in a statement: “On the basis of the changes and investments made to date we now anticipate group trading profit for the financial year ending February 2015 will not exceed £1.4bn.”
Dave Lewis, CEO of the company said, “Tesco is focused, and will continue to focus, on doing the right thing for customers. This means running our business in a way that everything we do creates sustainable value. Whilst the steps we are taking to achieve this are impacting short-term profitability, they are essential to restoring the health of our business. We will not engage in short term actions that compromise in any way our offer for customers.
We still have much to do but are making good progress in developing our plans to improve the long-term positioning of the Group and I will share more of that on the 8th January. Our priorities remain restoring competitiveness in the UK, protecting and strengthening the balance sheet and rebuilding trust and transparency. For now, all the Tesco team is focused on delivering the best Christmas for customers.”
Commenting on today’s announcement from Tesco, Neil Saunders, Managing Director of Conlumino, says, “Today’s profit warning from Tesco will come as no surprise. However, it does underscore the scale of the problems the grocer is still facing as it tries to adjust to the new trading environment.”
Tesco needs to invest in both pricing and improving the shopping experience for consumers. When such investment is made against a backdrop of falling sales it will inevitably impact profitability. However, such a move is a necessarily evil; the price of failing to accept a reduction in profit would simply be the continued deterioration of the business.
The question is whether or not the measures Tesco is now taking will allow it to increase its market share once again. The answer is that it could but it is by no means guaranteed. The competitive environment in grocery is so intense that it is not possible for all players to grow.
There is now a sense that expectations around margins and profits in grocery need to be reset. Tesco’s announcement today is part of managing that expectation. It remains a profitable and successful business but the days easy growth and easy profit are now firmly over.
Tesco said it planned to update the market further on 8 January.