The trading crisis engulfing Tesco has deepened as the supermarket giant was forced to issue another profits warning.
Shares in the retailer, which has been struggling in recent years to compete against discounters such as Aldi and Lidl, slumped as it also revealed it was slashing its dividend payment to shareholders and drafting in its new CEO Dave Lewis early in a bid to combat the firm’s decline.
The former senior Unilever executive, who takes over from ousted former boss Philip Clarke, will start work a month earlier than planned and will immediately begin work on a review of “every aspect” of the group’s operations.
In an update yesterday Tesco said market conditions remained challenging as it cut its forecast for 2014/15 trading profits to between £2.4 billion and £2.5bn. Both figures are well below City forecasts and significantly down on the £3.3bn profit it reported last year.
Tesco’s decision to cut its half-year dividend to 1.16p per share, a 75% discount on the 2013 figure, is a blow to many UK pension funds.
“The board’s priority is to improve the performance of the group,” chairman said Sir Richard Broadbent yesterday.
“We have taken prudent and decisive action solely to that end.
“Our new chief executive Dave Lewis will now be joining the business on Monday and will be reviewing every aspect of the group’s operations.
“This will include consideration of all options that create value for customers and shareholders. The actions announced today regarding capital expenditure and, in particular, dividends have not been taken lightly.
“They are considered steps which enable us to retain a strong financial position and strategic optionality.”
The business has been under considerable strain since early 2012 when it shocked the market with its first profits warning in 20 years.
The situation prompted Mr Clarke to launch a £1bn turnaround plan, but latest annual results showed earnings down for the second year running.
Tesco has been caught in the grip of a price war driven by the growth of discount rivals and a squeeze on household budgets.
The company said: “The combination of challenging trading conditions and ongoing investment in our customer offer has continued to impact the expected financial performance of the group.”
Earlier this week industry till-roll figures from Kantar Worldpanel showed that Tesco sales were 4% lower in the 12 weeks to August 17 as its market share slid to 28.8% from 30.2% a year earlier.
Tesco shares opened 8% lower after the profits warning yesterday, while so-called ‘Big Four’ rivals Sainsbury’s and Morrisons fell 5% and 4% respectively.
Clive Black, a retail analyst at Shore Capital Stockbrokers, believes Mr Lewis will have to step up investment in pricing to arrest Tesco’s decline.
He said: “We expect, as part of a range of measures, considerable senior management change under Mr Lewis as Tesco needs a world-class top team to take it forward.”
Analysts speculated that savings from the lower dividend and the curtailed store refit programme would give the supermarket the financial firepower needed to launch a new price war.
“Tesco’s investment in margin and recovery plan could easily wipe-out the majority of its main competitors’ trading margins, forcing them to reduce their dividends and capital expenditure and also forcing the discounters back to a loss-making position, as they were in 2009,” Cantor Fitzgerald analyst Mike Dennis said.
He said Mr Lewis may need to find an extra £500 million of annual cost savings, which could have a major impact on UK staff numbers.
Tesco shares closed down 6.64%.