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Tesco issues £500m profits warning

New Tesco boss Dave Lewis spelled out the scale of the problems facing Britain's biggest supermarket as it issued a £500 million profits warning today.

The chief executive, who took over in September, said investments in improving its customer offer such as price and availability of key products, and shaking up its supply chain in the wake of an accounting scandal, would take their toll.

He said more tough choices lay ahead but claimed that a turnaround of the supermarket's fortunes was in his sights.

Shares slumped by as much as 16% - wiping nearly £2 billion from the group's stock market value - after it said trading profits would not exceed £1.4 billion in the year to February, well below City expectations of at least £1.9 billion.

Mr Lewis said: "We have got ourselves into a place which is difficult, particularly financially. But I can see very, very clearly a way out of that financial position."

He admitted that Tesco's head office had gone through a turbulent period after a raft of executives - including UK managing director Chris Bush - had left, but hinted there could be more blood on the carpet.

Mr Lewis said: "It's been a difficult time for Tesco. We've had to take some difficult decisions about colleagues who are near and dear to us.

"I've had to make some very, very, very tough calls and there will be more tough calls as chief executive of Tesco ahead of me."

He acknowledged the impact of his shake-up on the group's share price but said the changes would create "medium-to-long-term shareholder value" and that latest signs from stores showed "reasons to be quietly optimistic".

He said he had decided against using "levers" that could be pulled to beef up full-year profits but would hit the customer offer - such as cutting back on staff after Christmas even though stores will see 25-30% less activity.

Mr Lewis has temporarily taken change of the supermarket's UK operations and indicated he will recruit a permanent holder of the role in the next couple of months.

He has previously set out plans to increase staff numbers and product availability to improve customers' experience in stores and said today this has resulted in 6,000 more people being employed and nearly three million more staff hours.

Meanwhile, Tesco is reforming the way it deals with suppliers, an area that was at the centre of its £263 million accounting blunder earlier this year, with Mr Lewis personally taking charge of the retraining of 963 staff.

The complex changes will see a "more long term sustainable relationship" with the supermarket relying less on squeezing those companies to boost its profit margin, through measures such as rebates.

Mr Lewis said the group now had "much more visibility" on the impact of the changes being made leading to today's guidance on profits.

He said: "Tesco is focused, and will continue to focus, on doing the right thing for customers. This means running our business in a way that everything we do creates sustainable value.

"Whilst the steps we are taking to achieve this are impacting short-term profitability, they are essential to restoring the health of our business. We will not engage in short-term actions that compromise in any way our offer for customers."

The chief executive gave little away about the impact of strategy changes on current trading though he said there had been an improvement in volumes after its focus on more availability for the 1,000 most popular lines, such as fresh produce.

Tesco's expectation of an annual trading profit of no more than £1.4 billion is less than half the £3.3 billion achieved for 2013/14. It is the fourth profits warning this year by the group.

The group is still overshadowed by the accounting scandal uncovered earlier this year, which is being investigated by the Serious Fraud Office.

An investigation found that rebates from suppliers were moved to different periods on the company's balance sheet, as far back as 2012/13 and possibly longer.

The departed Mr Bush had been one of eight who were suspended in the wake of the accounting scandal. Three others have also left, one has returned to his job, and three remain suspended. Mr Lewis has said their suspensions did not indicate guilt.

Tesco shares today plunged to their lowest level in more than a decade, with the slump wiping out a mini-recovery seen since the end of October.

Cantor Fitzgerald analyst Mike Dennis said the latest profits warning implied its UK profits for the second half would be wiped out by 99% to £15 million.

He said he expected the recovery to take longer than expected as Mr Lewis has to simplify the UK business, then reconnect with suppliers by changing payment terms before starting on the long road to rebuilding the Tesco brand with shoppers.

As well as its internal difficulties, Tesco has been battling a fierce price war as discounters Aldi and Lidl continue to eat into its market share.

Neil Saunders, managing director of retail consultancy Conlumino, said: "Tesco needs to invest in both pricing and improving the shopping experience for consumers.

"When such investment is made against a backdrop of falling sales it will inevitably impact profitability.

"However, such a move is a necessarily evil; the price of failing to accept a reduction in profit would simply be the continued deterioration of the business."

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