Online grocer-turned-technology platform Ocado’s (OCDO) stunning share price ascent is interrupted by mixed half year results, which trigger a 5% decline to 961.6p.
For all the recent hype, Ocado still doesn’t generate significant earnings. It lurched into a first half loss following higher than expected levels of investment and warns of more investment costs to come in the second half too.
Ocado’s share price has rocketed higher since late 2017, spirited into the FTSE 100 on excitement surrounding a series of international deals struck with the likes of Casino in France, Sobeys in Canada, ICA in Sweden and most exciting of all, a partnership with US groceries giant Kroger.
These overseas retailers are stumping up to use the company’s Ocado Smart Platform, which combines Ocado’s software, algorithms and robotic warehouses to power online grocery retail.
LURCHING INTO LOSS
Ocado may well be ‘working at pace to capitalise on unprecedented opportunities’, yet interim results still reveal a swing from pre-tax profit of £7.7m a year ago to a £9m loss.
Profitability was impacted by significant investments in more UK capacity and in Ocado’s platform to aid future growth, share-based management incentive charges as the stock rocketed into the blue chip benchmark, and a 26% rise in depreciation to nigh-on £42m.
Bulls will point to continued revenue growth, with group sales up 12.1% to £800m in the 26 weeks ended 3 June.
Core retail revenues rose 11.7% to £736.6m while the solutions business, which powers Morrison’s (MRW) online delivery service and encompasses those monies earned from the burgeoning band of international partners, grew 16.8% to £63.3m.
Yet a metric to note is the average Ocado.com basket size reduced to £108.18 (2017: £108.45), with customers ordering slightly smaller baskets more frequently.
COUNTING THE COSTS
CEO Tim Steiner insists this is a transformational period for Ocado. ‘In the past six months we have partnered with some of the world's, biggest, best and most innovative retailers to help them redefine the shopping experience for their own customers. As a result, we are beginning to fulfil our ambition to change the way the world shops.’
Yet he also cautions that ‘in order to fully capitalise on the opportunities ahead of us, we are working at pace, investing more and focussing sharply on execution to bring on new capacity in the UK and to achieve successful outcomes for our partners.’
Accordingly, second half retail earnings before interest, taxation, depreciation and amortisation (EBITDA) will be impacted by the fixed costs of Ocado’s largest ever customer fulfilment centre in Erith.
Steiner also braces investors for a decline in Solutions EBITDA as it makes a further £4m investment in its capabilities and platform and as it defers recognition of upfront fees over multiple years.
WHAT ARE THE ANALYSTS SAYING?
Shore Capital appears largely unimpressed, writing: ‘Overall this is very much another set of mixed results from Ocado. The revenue growth of 12% continues to come through but this is not translating into earnings, which continues to be Ocado’s Achilles heel.
'The latest customer fulfilment centre has now opened at Erith in South East London which over time will aid capacity over the medium term.
‘The capital raise of £324m in the first half gives the company headroom to continue to invest but the Ocado investment case continues to be invest more now for possible future returns. In our view, this looks like a continued promise of more jam tomorrow.’
Peel Hunt argues that Ocado is at its inflection point where it is now a technology business, ‘and thus deal flow and maturity of its long-term contracts will drive the shares as it transforms the retail industry’.
WHERE IS THE MONEY BEING MADE?
Russ Mould, investment director at AJ Bell, remarks: ‘Although Ocado would like to be seen as a technology company, its half year results paint a very different picture. It generated 11 times more revenue from selling groceries than supplying technology systems and services.
‘Admittedly the business has done very well in the past year by signing up more international partnerships using its software, algorithms and robotics systems. But that’s all about the future. Today is about a company generating sales by delivering food and drink to UK consumers.
‘And if you were to judge the company purely on its latest numbers rather than what it may earn in the future, then you’ll see a business in mixed shape.
‘It still cannot turn solid revenue growth into profit; the average basket value is still slipping in size; yet the total order volumes are increasing.
‘You would normally associate a FTSE 100 company with one making significant earnings but Ocado very much bucks the trend.’
