Tesco in trouble after profit warning and divi cut but analysts hold on

29th August 2014

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Poor trading has forced Tesco to issue another profit warning and slash its dividend 75%, but analysts have not given up hope just yet.

The shock announcement marks the second profit warning in two months and follows the departure of Philip Clarke as chief executive. The problems in the company have lead Dave Lewis, Clarke’s replacement, to start his role a month earlier and will take up his new position on Monday.

In the past three months Tesco sales have fallen 4% and the supermarket is forecasting trading profits for the six months to August will be £1.1 billion compared to £1.6 billion last year, and full year profits will be between £2.4 billion and £2.5 billion – a stark contrast to last year’s profits of £3.3 billion.

The cut in the dividend is also far more severe than the City had anticipated. Tesco chairman Richard Broadbent confirmed the interim dividend will be reduced 75% to 1.16p per share as the board focuses ‘on maintaining a strong financial position in order to maximise its business and strategic optionality’.

Shore Capital analyst Clive Lewis said he had ‘lost count of the number of times that we have downgraded our forecasts for Tesco over the last three years or so’ and that today’s announcement ‘represents the inverse of whatever the icing on the cake stands for’.

Black said the on-going problems at the company were disappointing but created greater concerns.

‘It is very disappointing to see this update, which fundamentally raises questions in our minds about the capability of the management under Clarke at this once great company,’ he said. ‘As such, we expect, as part of a range of measures, considerable senior management change under Lewis in time, as Tesco needs a world class top team to take it forward.’

He said the operational challenges and pressures for Lewis are ‘clearly considerable’ although the cutting of the dividend will help ease some financial pressure.

‘We can speculate but not predict Lewis’ priorities,’ said Black. ‘As such we should also respect the fact that he needs time to assess matters and manage the business. Hence, while this update is wholly inglorious and unhelpful, to our minds, it does not adjust our view that Tesco UK needs fundamentally better management and that this si a group where the pint can still be more than half full.’

Black reiterated a recommendation of ‘hold at 246p’, but adding that ‘the ‘pint’ is that little bit less full’. At midday Tesco shares were down 4.67% at 234p.

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