Tesco credit rating in further jeopardy following profit warning

By Erin Smith

Published: 10 December, 2014

Moody's Investor Services, an international credit rating agency, says Tesco's profit warning "will further increase negative pressure on Tesco's current rating" and that Tesco would remain under review for another possible downgrade.

"On 9 December the UK's largest grocery retailer Tesco plc (Baa3 under review for downgrade) stated that it anticipates that its trading profit for the 2014/15 fiscal year ending February 2015 will not exceed £1.4 billion. This is a material reduction compared with the £3.3 billion achieved in the 2013/14 financial year," the agency said in a statement.

Moody's statement said: "Significantly lower trading profit will further increase negative pressure on Tesco's current rating."

The reaction to the profit warning on the stock market was much more immediate.

Joshua Raymond, chief market strategist at cityindex.co.uk, said: "Tesco (TSCO:LN) shares hit their lowest levels in over a decade after the firm warned that full year profits would not exceed £1.4 billion, which was sharply below the £2 billion projected by the market. It's just yet again more bad news for Tesco and yet another profit warning. The reaction in the market has been severe. Shares fell 14% to trade at a new low of £155, a level not seen since February 10, 2000, a 14-year low."

Tesco stock is currently trading at -45.28% one- year return.

But Raymond did say that the profit warning was a strategic move and helps the company cover its basis should the trading period not meet expectations and is a clear effort for the new leadership to be more transparent about its finances.

"The move to announce its profit warning before the Christmas trading period is a tactical one. The Christmas trading period is the most important for most supermarkets and the fact the firm is issuing a profit warning now means it is lowering expectation levels for the period. Should Tesco endure a poor trading performance its covered its tracks already, whilst at the same time any numbers that meet expectations could be seen positively as it won't take much to beat expectations" said Raymond.

Following the accounting scandal, by being more transparent Tesco is also hoping to rebuild investor and consumer trust.

Raymond said: "Following the accounting miscalculation, Tesco simply has to be completely visible on its numbers at its earliest opportunity. So issuing a profit warning as early as possible for its full year profits is both tactically clever and a necessity concerning the rebuild of its reputation."

The current Baa3 rating assigned to Tesco will remain for now, with Moody's concluding its credit review following the outcome and statements that Tesco said it would be releasing on January 8, 2014. Specifically, the agency is focusing on the "company's strategy to stabilise trends in its operations and improve its overall financial profile as it adapts to fundamental shifts within its home market."

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