Tesco reports 55% profit slump amid hint of SFO deal

DISGRACED supermarket retailer Tesco has conducted talks with the Serious Fraud Office (SFO) over a possible deal to conclude a year-long criminal probe into its £263m accounting scandal.

Tesco is hopeful of securing a deferred prosecution agreement (DPA) – giving the wounded giant the opportunity to confess to behaviour that led to the mammoth accounting black hole – and get slapped with a penalty fine, agree to abide by certain conditions and avoid criminal prosecution.

News of the potential deal emerged as the grocer released its half-year results which showed a 55% plunge in half-year operating profits to £385m, well down on last year, when it made £779m.

However, its pre-tax profit was £74m – a significant improvement on the £19m for the same period a year ago.

Like-for-like sales fell 1.3% for the UK and the Republic of Ireland.

In its report to the City it revealed that it had closed 53 unprofitable UK stores since the start of the year and slashed new store openings as a contribution from net new space to just 0.5%.

A big boost to its damaged balance sheet is the conclusion of its sale of Korean Homeplus business for £4.2bn, while it slashed capital expenditure by 61% to £0.4bn and expunged a million square feet of retail space out of the equation.

The retail giant has also radically restructured its teams in the Czech Republic, Hungary, Poland and Slovakia and is now optimistic of delivering annual savings of around £400m across the wider group.

Other notable changes a reduction in discounted operating lease commitments, due to an increase in the IAS 19 defined pension deficit and a small increase in net debt while the UK defined benefit pension scheme is to close in November and be replaced with a less generous defined contribution scheme.

It has also decided to keep hold of its dunnhumby data arm that powers its Clubcard loyalty scheme.

John Ibbotson, director of the retail consultancy Retail Vision, comments:
“A year into his tenure, Tesco’s embattled chief executive has lived up to his ‘Drastic Dave’ nickname.

“Yet on this evidence he will have to be more drastic yet. “Dave Lewis has not shied away from a ruthless pruning of Tesco’s bloated balance sheet, but this has failed to stop the group’s operating profit slumping by more than half.

“But the frantic selling off of Tesco’s family silver – including a £4bn deal for its biggest overseas asset, the South Korean unit Homeplus – has done little more than buy time. The greater problem remains flagging sales momentum. Like-for-like sales in the UK and Ireland are down 1.3% on the same time last year.”

Both the SFO and Tesco have remained tight-lipped on any details or timeline associated with a DPA – to which the SFO only received the powers to so in February 2015.

In April, Tesco made a record loss of £6.38bn in its last financial year, the worst set of results in its 100-years of existence.

The results – to the end of February – marked out 2014/15 as one of the worst years for Britain’s biggest supermarket group in what is the sixth-biggest corporate loss ever announced by a UK company.

Just 12 months previously it posted an annual pre-tax profit of £2.26bn.

Chief executive Dave Lewis confessed “it has been a very difficult year” for Tesco.

It is still being probed by the accounting and watchdog the FRC and the Groceries Code Adjudicator.