Tesco warns profits will be down

The British supermarket giant Tesco warns profits will be in the £2.4 billion to £2.5 billion ($3.98 billion to $4.15 billion) range rather than the £2.7 billion to £2.8 billion ($4.48 billion to $4.65 billion) that analysts had been expecting, highlighting the challenge incoming CEO Dave Lewis is facing.

After issuing its third profit warning in three years, the UK’s largest retailer, which is floundering against fierce competition in its domestic market, added that it will significantly cut its interim dividend as well as capital expenditure.

Its first-half dividend will drop 75% (compared to 2013) to 1.16 per share. Capital expenditure for the full year will be reduced by £400 million to $2.1 billion.

Losing market share

Tesco’s market share is being gradually eroded by Lidl and Aldi, two no-frills competitors.

Kantar Worldpaner published a report earlier this week showing that British grocery market share is shifting away from the big giants, such as Tesco and Sainsbury’s, to low-priced retailers Lidl and Aldi, where more than half the country’s population do their shopping today.

For a 12-week period ending on August 17, Tesco’s market share fell to 28.8% compared to 30.2% during a similar period in August 2013. Over the same two periods, Lidl’s and Aldi’s market shares increased from 3.1% to 3.6% and 3.7% to 4.8% respectively.

In a statement, Tesco said:

“The business continues to face a number of uncertainties, including market conditions and the pace at which benefits from the investments we are making flow through in the second half.”

Dave Lewis and Philip Clarke

Will Mr. Lewis be able to halt years of decline?

New CEO brought in early

Mr. Lewis joins the company on Monday as the new CEO, one month earlier than planned. He takes over from Philip Clarke who was ditched last month. Tesco said he will be reviewing every aspect of the business with the aim of improving its competitive position.

Most analysts believe today’s profit warning was issued to clear the slate for Mr. Lewis before he starts, i.e. it buys him some time and keeps investors from breathing down his neck from day one with questions and demands.

Tesco’s problems have been growing for several years. Sales recently fell 4% year-on-year, and the fall seems to be gaining speed. August sales declined more sharply than in August 2013.

In early trading in London today, Tesco shares took an 8% nosedive to 226.70p, an 11-year low. So far this year, Tesco shares have declined by 31%.

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