London-based food delivery start-up Deliveroo (ROO) continues to enjoy tailwinds of Covid lockdown life. These changes to consumer behaviour look increasingly like sticking yet an industry where growth is being continually outstripped by expanding costs is an ugly place for investors to be.
Calendar 2021 results (to 31 December) show revenues up 57% to £1.8 billion, roughly as expected, on GTV (gross transaction value) 67% up at £6.6 billion aided by a 73% rise in order volumes, to 301 million.
‘A detailed presentation offered a refreshing level of granularity on historic trends, progress on growth initiatives, evidence of local profit pools and the path to profitability,’ said Numis analysts on Thursday (17 March 2022).
SIFTING THROUGH THE NUMBERS
A few things to note here. GTV growing at a slower rate than orders implies lower average order size. This might be a normalisation of trends as nations eased out of pandemic restrictions, as the company claims, so the trend is worth watching.
Second, Deliveroo’s revenues grew at a lower pace still, which points to rising costs, an issue that has dogged the takeaway deliveries market from day one.
This second point is evidenced in clear black and white in the figures, where marketing costs and other overheads soared from £358.5 million in 2020 to £628.7 million last year, far outpacing the 43% rise in gross profit to £497.3 million in 2021. That puts the gross profit margin (as a percentage of GTV), a figure Deliveroo actively promotes to investors, falling from 8.7% to 7.5%.
Fans of the business and the fast-food delivery model per se, will likely argue this is a too simplistic way to read progress. There is some truth is that, given the multiple levers Deliveroo is pulling around international expansion, seeding a nascent grocery deliveries market, managing its rider base and much else.
Investors were evidently impressed by the results, the shares rallying nearly 6% to 123.35p, and off recent record lows of 106p.
PROFIT QUESTIONS REMAIN THE SAME
Yet the debate around the online takeaway food players’ 2021 performance and guidance for this year are increasingly putting adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) breakeven and the prospects for sustained profitability in the spotlight.
This is something Shares touched on in detailed last year.
For the record, adjusted EBITDA losses widened from £11 million to £131 million last year, although beating consensus of a £156 million loss.
For calendar 2022 analysts before today’s results were calling for adjusted EBITDA losses of £129 million (a 1.5% improvement) on £2.3 billion revenues, 26% up on 2021.
‘For now shareholders seem encouraged by the company’s ambition and the greater the scale, the better the business should perform,’ said Russ Mould, investment director at AJ Bell.
‘However, there is a danger that the cost of living crisis pushes ordering in from an affordable treat for most households to something only more affluent families can afford to do regularly, putting pressure on Deliveroo’s growth.’
There are headwinds to contend with and net cash of £1.3 billion is helpful, but is the future of the Deliveroo merely tied to being a snack to be picked up by a bigger industry player with a large appetite for consolidation.
‘We cannot help but conclude that the Deliveroo story may be all about M&A,’ conclude analysts at broker Davy.
DISCLAIMER: Financials services company AJ Bell referenced in this article owns Shares magazine. The author (Steve Frazer) and editor (Martin Gamble) own shares in AJ Bell.
