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Alarm in City as Tesco issues profit warning

TESCO has alarmed investors by warning that its slump in profits will be worse than expected, slashing its dividend payment by 75 per cent and bringing in its new chief executive a month early to try and turn the supermarket giant around.

Shelf LIFE: Tesco has been experiencing falling profits while discount grocers Lidl and Aldi have both done well
Shelf LIFE: Tesco has been experiencing falling profits while discount grocers Lidl and Aldi have both done well

Britain's biggest retailer said it expects to make a trading profit of between £2.4 billion and £2.5bn in this financial year, more than 16 per cent lower than analysts had forecast and about a quarter below its earnings last year.

The announcement yesterday marked the second profit warning in two months for Tesco, which has more than 200 stores in Scotland and more than 3,300 across the UK. Shares in Tesco fell 6.6 per cent to 229.95p, the lowest closing price since 2003.

Investors in the firm have seen their stock lose a third of its value since the beginning of the year.

Tesco has also brought forward the start date for new chief executive Dave Lewis, who will take up the top job on Monday, rather than in October as planned.

Philip Clarke has stepped down from the firm after three years in charge and 40 years at the company. His departure was announced in June alongside a profit warning.

Mr Lewis, who joins from consumer goods group Unilever, is the first man to lead Tesco without either spending most of his career at the firm or being a relative of founder Sir Jack Cohen.

He will immediately start a review of "all aspects of the group" in a bid to return Tesco to growth.

The board has cut the firm's interim dividend by 75 per cent to 1.16p per share and pledged to spend £400m less on IT upgrades and store refurbishments this year, reducing its capital spending budget to £2.1bn.

"The actions announced today regarding capital expenditure and, in particular, dividends have not been taken lightly," said chairman Sir Richard Broadbent. "They are considered steps which enable us to retain a strong financial position and strategic optionality."

Tesco has borne the brunt of increasing pressure from discount grocers Aldi and Lidl, which have both enjoyed double-digit rises in sales in recent months. Tesco's market share has dwindled from 31.8 per cent in 2007 to 28.8 per cent this month.

Tesco's takings at the tills were four per cent lower than last year during the 12 weeks to August 17, according to figures from Kantar Worldpanel released this week.

The firm's UK annual like-for-like sales have been in decline since 2012, and trading profits have dropped for the past two years.

"It is very disappointing to see this update, which fundamentally raises questions in our minds about the capability of the management under Mr Clarke at this once great company," said Darren Shirley, retail analyst at Shore Capital.

"As such, we expect, as part of a range of measures, there to be considerable senior management change under Mr Lewis in time, as Tesco needs a world-class top team to take it forward." Mr Shirley estimated that the dividend cut would save the company about £900m, providing financial ammo for the new team as they attempt to recover lost sales.

For investors, the lower dividend takes Tesco's yield down from six per cent to 1.6 per cent.

Some analysts pointed out that the update allows Mr Lewis to join the firm when it is at its lowest ebb, accentuating any improvements he makes in future - a tactic known as kitchen sinking. "The rationale for the crimp on overall capital expenditure is understandable and prudent, whilst the timing of the announcement enables the incoming chief executive to begin with the kitchen sinking having been done," said Richard Hunter, head of equities at Hargreaves Lansdown.

"However, if investors' resolve was being tested up until this statement, it is now nearing breaking point."

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