Last week, my fellow Fool writer G.A. Chester warned that shares in Tesco (LSE: TSCO) could fall below 200p. Following the latest Tesco shocker, he’s been proved right.
At time of writing, the stock trades at 198p after new boss Dave Lewis revealed a gaping £250m black hole in the supermarket’s accounts.
Just when you thought things couldn’t get worse at Tesco, it does. Again.
Integrity And Transparency
Cynics have suggested that Lewis is airing Tesco’s dirty laundry before he can be blamed for the suspicious stains, and frankly, I hope that is the case. He’d be crazy to do anything else.
The last thing investors need is for markets to lose faith in the new boss. Right now, Lewis is Tesco’s only hope. He has given the impression of acting quickly and decisively, suspending four staff and calling in outside investigator Deloitte.
The black hole only came to light on Friday, thanks to a whistleblower. Investors will be looking to see if this is a one-off, or just one example of Tesco creative accountancy.
A Serious Issue
What it does is confirm is how badly Tesco has lost its way. We already knew it was failing to match up to the challenge posed by external competitors such as Aldi and Lidl, now we know its internal procedures are wonky as well.
This also exposes Tesco’s arrogance, a major factor in its decline. Investors should have paid closer attention to long-term supplier complaints about poor treatment and slack attitudes to paying invoices.
Early booking of revenue and delayed recognition of costs, have made Tesco’s profits look better than they really were.
Now investors are paying the price.
Full And Frank
Tesco’s profits will be 23% lower than the £1.1bn it told investors to expect at the end of last month. And way down on the £1.58bn it had predicted before that.
One profit warning can be regarded as a misfortune, two looks like carelessness. But what words are left to describe profit warnings three and four? Arrogance? Stupidity? Desperation? Corruption? Deloitte will hopefully find out.
Lewis had better keep riffling through that laundry pile, because his new regime needs to avoid any hint of contamination. He must be squeaky clean.
Decisive Action
There is no easy way out of this for Tesco. Earnings per share are forecast to fall 30% in the year to February 2015, and 10% in the subsequent 12 months. Tesco was the future once. Now it’s Aldi and Lidl.
Tesco is down 40% in a year. It trades at a lowly 7.2 times earnings. The share price could fall further, especially if the 75% interim dividend cut is carried through to the final dividend.
Bold investors might decide this is the moment of maximum pain.
G.A. Chester said a dip below 200p could represent the final ‘capitulation’ that smart contrarian investors look for as a signal to start buying.
Now, the decision rests with you.
