By James Davey and Kate Holton
LONDON (Reuters) - Dave Lewis, the new boss of crisis-hit British grocer Tesco Plc (L:TSCO), will face his first public test on Thursday when he reveals the damage caused by a financial scandal on a business already losing popularity with shoppers.
Britain's biggest retailer has been reeling since Sept. 22 when it said an earlier profit warning had still overstated first-half group profit by around 250 million pounds, wiping a fifth off its market value.
Analysts and investors believe the discovery of the accounting black hole will likely push back any new strategy from Lewis, meaning the focus of his first presentation will be on the impact on full-year forecasts from the mis-statement, the deteriorating trading conditions across the industry and plans for Christmas.
The best-case scenario for Lewis is that the accounting issue proves to be no more than "phasing", or bringing forward profits into an earlier period that will not change future profits, and was an isolated incident that occurred as a result of accident or incompetence.
The worst case, says Cantor Fitzgerald analyst Mike Dennis, is of malpractice going back many years requiring a longer investigation and involving more companies.
Investors will also be alert to any hints about his turnaround plan which could include price cuts, a sale of non-core assets, a possible fund raising, lower spending and further property writedowns.
"Dave Lewis still has to put out more fires before he can start thinking about rebuilding the house," said analyst Bruno Monteyne at brokerage Bernstein.
In a memo emailed to staff last Friday, a copy of which was seen by Reuters, Lewis said he expected to be in a position on Thursday to give the market "a clear and accurate indication of our income for the first half of the year."
The accounting scandal related to the way Tesco booked payments from deals with food suppliers early, while at the same time pushing back the recognition of costs.
Key questions remain. How long was the practice going on? Who was involved? Was it deliberate or accidental? And what will be the impact on full-year results?
Last month Lewis, who replaced the ousted Phil Clarke on Sept. 1, called in accountants Deloitte to carry out an independent investigation along with legal advisers Freshfields.
REGULATORY PROBE
The probe has resulted in eight senior managers being suspended, including UK managing director Chris Bush. Tesco is also being investigated by Britain's financial regulator.
Such headaches could distract Tesco's management as they gear up for the crucial Christmas period.
Sky News reported on Saturday that Tesco's profit overstatement would be "better than feared", falling between 200 million pounds and 250 million, and that there was no need for previous years' profits to be restated.
The Sunday Telegraph reported that Tesco's investigation had uncovered a pattern of "inappropriate behaviour" by staff in their dealings with suppliers.
Tesco has declined to comment on either of these reports.
Compounding Tesco's problems, Britain's grocery market is growing at its slowest pace in over 20 years due to a combination of an escalating price war, consumers shopping around and restaurants luring more people to dine out.
Its shares, which have edged up from an 11-year low of 168 pence set on Oct. 6, trade on a multiple of 10.1 times forecast earnings, according to Reuters data, a 19.1 percent discount to domestic peers but a premium to the 9.5 times multiple of close rival Sainsbury (L:SBRY).
The group, Britain's biggest private-sector employer, has also been wrongfooted by the increasing popularity of shopping online and in convenience stores, making Tesco's bias to big out-of-town sites less attractive.
Tesco has forecast trading profit for the six months to Aug. 23 of 850 million pounds - the original guidance of about 1.1 billion pounds made on Aug. 29 minus the 250 million overstatement indicated on Sept. 22. That compares with 1.6 billion a year ago.
The company has also said it will pay an interim dividend of 1.16 pence, a 75 percent cut on last year. Analysts expect the final payout to be similarly reduced.
Analysts forecast Tesco's second quarter UK like-for-like sales, excluding fuel and VAT sales tax, to be down about 6 percent, having fallen 3.8 percent in the first quarter.
Industry data published by market researcher Kantar Worldpanel on Tuesday showed Tesco's total UK grocery sales fell 3.5 percent in the 12 weeks to Oct. 12.
Lewis said in his memo to staff Tesco's recent performance in food "has been one of our strongest for a very long time."
(Editing by David Holmes)