Tesco shares plunge 15% after profit warning

Tesco has announced that its group trading profit for the full financial year "will not exceed £1.4bn", which falls behind the expected profit between £1.8bn to £2.2bn.

This profit update comes after the supermarket chain's admission of misstating its profits by £263m. Tesco shares plunged 16% following this announcement. Tesco had already cut its profit forecast for the financial year to £2.4bn from £2.8bn in August, before the accounting irregularities were discovered.

The new chief executive of Tesco and Dave Lewis claimed that the profit shortfall was caused by the way the chain deals with its suppliers and taking on 6,000 new staff. However he added, that: "We have taken a very deliberate decision not to take short-term measures that would close the profitability gap in the short term, but would not improve relations with customers and suppliers."

As part of the solution, Tesco has now retrained all 900 employees responsible for negotiating terms with suppliers. These steps affected Tesco's short-term profits, however its CEO believes that in the long-run "they are essential to restoring the health of our business".

"It does imply we are trying to make more on the front margin rather than the back margin, on how we sell rather than how we buy. It's a much more efficient model for everybody," Dave Lewis added.

It is apparent to some analysts that the plan to turn around the supermarket group could take some years. Analyst from Cantor Fitzgerald Mike Dennis pointed out, that Tesco's CEO needs to "simplify the business via UK and international asset sales, then reconnect with suppliers by changing payment terms and lowering his cost of goods and then start on the long road to rebuilding the Tesco brand with shoppers".

A criminal invistigation into the accounting irregulatiries at Tesco is being carried out at the The Serious Fraud Office (SFO). Eight executives were suspended while an investigation into the accounting irregularities was carried out, and it is understood that four of the suspended executives have now left the company.

It is expected that the next update from Tesco will come out on 8 January.