Tesco slashes profit forecast and dividend as trading slumps

LONDON, United Kingdom - Britain's biggest retailer Tesco slashed its interim dividend by 75 percent as tough trading conditions forced it to cut its profit forecast for the second time in two months.

Tesco, which warned on profits in July as it ousted chief executive Phil Clarke, also said his replacement Dave Lewis would start on Monday, one month earlier than expected, and with a remit for a major review of the company.

Lewis will get more financial flexibility from the dividend cut to 1.16 pence per share and also from a 400 million pound (664.20 million US dollar) reduction in the retailer's capital spending plan as the group scales back investment in store roll-outs and IT.

Shares in Tesco, which have been languishing at 10 year lows, slumped 8.5 percent. Rivals Sainsbury's fell 5 percent and Morrisons dropped 4 percent. Tesco's share price fall of 8.5 percent on Friday was the biggest one-day drop in two and a half years

"The board's priority is to improve the performance of the group," Chairman Richard Broadbent said.

"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."

Tesco, the 95-year-old group which has long dominated the British high street, has been battling fierce competition from rivals at the lower and upper end of the market.

The darling of the retail sector during two decades of uninterrupted earnings growth, Tesco started losing ground in its home market before long-standing CEO Terry Leahy departed in 2011.

His successor Clarke, who spent more than 1 billion pounds on a failed recovery plan, issued his first profit warning in January 2012, and his second in July as he stepped down.

On the rack

"A dividend cut of this degree underlines the extent of the problems Tesco is facing," Phil Dorrell, director of consultants Retail Remedy, said. "Throw in the fact that Dave Lewis is being parachuted in a month early and you have a grocer that is truly on the rack.

"What's certain is that we won't be seeing a rapid turnaround."

Analysts had been expecting a cut to the dividend to give Lewis the financial firepower needed to stage a recovery, but the magnitude of the cut took the market by surprise. Industry data released on Wednesday showed Tesco's sales decline had worsened, hurt by the weakest overall market growth in a decade, with its sales down 4.0 percent year on year in the 12 weeks ended Aug. 17.

Its market share has dipped to 28.8 percent from the 30.7 percent it held when Clarke took over in March 2011, as it lost ground to discounters Aldi ALDIEI.UL and Lidl LIDUK.UL at one end and upmarket grocers such as Waitrose [JLP.UL] at the other.

Rivals Sainsbury's and Wal-Mart's (WMT.N) Asda have remained largely stable while Morrisons, the country's fourth largest player, has also struggled.

"Dave is really keen to get started and the board recognized the need to get on and address these challenges," a source familiar with the situation told Reuters.

Clarke, a 40-year Tesco veteran, will remain on hand to help with the transition through to January.

Tesco now expects trading profit for 2014/15 to be in the range of 2.4 billion pounds ($3.98 billion) to 2.5 billion pounds, compared with an analyst range of between 2.7 billion pounds and 2.8 billion pounds.

The company's website showed average forecasts of around 3 billion pounds.

Tesco said for the current financial year, capital spending will now be no more than 2.1 billion pounds.

$1 = 0.6030 British Pounds