Tesco Plc (TSCO) and its directors misled investors about its financial health, according to a Texas retirement fund that sued the U.K.’s biggest retailer, adding to a year with which Tesco was plagued by accounting irregularities and increased competition.
The grocer’s sales have fallen under pressure from German discount rivals Aldi and Lidl, and its finances are being stretched. Yesterday, Tesco’s credit rating was cut to the lowest investment grade after the company reported a 41 percent decline in profits.
The Irving Firemen’s Relief and Retirement Fund, of Irving, Texas, blamed the “significant losses” it incurred by investing in Tesco on artificially inflated stock prices, which were based on overstated profits. The retirement fund sued to recover its losses in Manhattan federal court yesterday.
Tesco shares plummeted Sept. 22 after the supermarket chain said some income was booked before being earned and costs were recognized later than incurred. Warren Buffett was among investors to cut his stake.
Yesterday, the Cheshunt, England-based company said the accounting caused it to overstate profit by 263 million pounds ($423 million), with more than half of that amount predating this year.
Tesco declined to comment on the complaint by the fund, which has 463 members, according to its website. The lawsuit names former Chief Executive Officer Philip Clarke and Laurie McIlwee, the former chief financial officer, who resigned in April.
Clarke, who was replaced in September by David Lewis, a former Unilever executive, couldn’t immediately be reached for comment. McIlwee couldn’t immediately be located for comment.
The Irving fund is seeking to represent all Tesco shareholders who purchased American depositary receipts, each representing one ordinary share, from Feb. 2 to Sept. 22, according to the complaint.
Tesco’s ADRs fell about 43 percent during the class period from a high of $16.97, the fund claimed.
Tesco “carried out a plan, scheme and a course of conduct” which was intended to deceive the investing public, the fund said in the complaint.
Tesco has cut its profit outlook three times in two months after losing U.K. market share. The company’s net debt rose 7.1 percent to 7.5 billion pounds ($12 billion) in the first half of the year, while non-current liabilities, or long-term borrowings, increased 18 percent to 16.5 billion pounds, according to the retailer’s accounts.
Chairman Richard Broadbent said yesterday that he plans to step down.
Moody’s Investors Service lowered its credit rating on Tesco to Baa3, the lowest investment-grade level, and said the rating may be cut further to junk status. Fitch Ratings took similar action.
The case is Irving Firemen’s Relief and Retirement Fund v. Tesco Plc, 14-cv-8495, U.S. District Court, Southern District of New York (Manhattan).