As Tesco Profits Vanish In Flawed Accounts, Analyst Says It's 'No Longer A Viable Investment'

Tesco is not having a good year.

This morning the UK’s biggest supermarket revealed that it overstated its profits in the first half of the year by an astonishing £250 million. In August it said its trading profit was around £1.1 billion, but the figure has now been clipped by more than a quarter.

The chain has been forced to call in accountants from Deloitte to investigate the massive shortfall, and the share price is down by more than 8% at the time of writing.

Marc Kimsey at Accendo Markets offered investors his brutal take in a note titled “every little hurts” this morning:

“Tesco is no longer a viable investment. Traders are clearing the books of all holdings and reallocating funds in sector peers. The last two years have tested investors’ patience but with the dividend being cut back and today’s revelation, justification to hold is non-existent.”

Analysts at Cantor Fitzgerald said they were expecting an even worse drop in profits: a £300m overestimation would mean a fall in earnings of around 55% on sales excluding VAT. Tesco had revenues of £63.557 billion in 2013/14, and the slump in profit is making margins look increasingly thin.

In a note to clients, Cantor’s Mike Dennis said: “The read across is that Tesco may now have to sell assets across its UK and International portfolio to pay for this behaviour.”

The new boss at Tesco isn’t one to shy away from massive cuts — nicknamed ‘Drastic’ Dave Lewis, he cut 40% of the firm’s costs and laid off 300 workers as chairman of Unilever UK. With more than half a million employees, Tesco is the UK’s second-largest private employer, and major workforce cuts could be extremely painful.

Today Lewis said “we have uncovered a serious issue and have responded accordingly,” and that “I expect Tesco to operate with integrity and transparency.”

Tesco is still the country’s biggest supermarket, but its market share is slipping at the fastest pace in 20 years.

Screen Shot 2014 09 22 at 9.13.18 AMBloombergTesco’s share price has slumped by more than 40% in the last year.

Credit ratings agency Standard & Poor’s snipped Tesco’s rating to BBB in August, putting the supermarket only a couple of rungs above an investment not deemed appropriate for anything other than speculation.

The worst could still be yet to come.

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