Online grocery retailer Ocado (OCDO) disappointed the market with its latest results which showed the firm made more losses in the year to 28 November 2021 and is likely to continue trading at a loss this year due to the enormous cash spend on rolling out its smart platform.
Shares in the FTSE 100 firm slumped as much as 10% to £12.64 in early trading on Tuesday, wiping almost £1 billion off their value and taking them close to their pre-pandemic level.
ALL TALK, NO PROFIT
Led by chief executive Tim Steiner, Ocado has developed a reputation for being ‘all talk and no profit’ according to Russ Mould, investment director at AJ Bell, and its latest full year results show a continuation of negative earnings at a group level.
Group revenue grew by a pedestrian 7.2% to £2.5 billion and Ocado’s loss before tax widened from £52.3 million to £176.9 million after continued hefty investment in building its technology capabilities for grocery retail customers.
To its credit, Ocado made strategic progress during the year. More customer fulfilment centres were opened, including the first two in the United States for Kroger, adding to other international customer fulfilment centres ‘already ramping’ in Canada and France, for Sobeys and Groupe Casino respectively.
And in the UK, Ocado’s joint venture with Marks & Spencer (MKS) is proving a major success.
Steiner said ‘the past year has further reinforced that demand for online grocery is here to stay’ and insisted that ‘the new generation of Ocado technology, which we have called “Ocado Re: Imagined”, represents a transformational leap forward allowing our partners to comprehensively out-compete peers online.’
BLACK PUTS THE BOOT IN, AGAIN
However, Ocado perma-bear Clive Black at Shore Capital pointed out capital expenditure is set to increase to circa £800 million in the current year, which means Ocado’s cash burn will ‘remain horrendous whilst new solutions deals are guided to negatively impact short term profits! So, there is no positive offset of recent transactions and just, spend, spend, spend with very limited return.’
In his latest scathing assessment of the business, Black said his team had given up seeking to forecast Ocado some years ago as ‘guidance from the company was rarely delivered and transparency or visibility of earnings was zilch. That reality is manifested in the endless stream of downgrades, see yet again today, to forecasts by its house brokers for all sorts of reasons, resulting in the still current EBIT losses and dim prospects of anything like satisfactory capital returns.’
Black also highlighted a ‘growing realisation that Ocado’s proposition is facing demonstrably greater competitive challenge, which leads to a smaller pot of gold should the end of the rainbow ever be reached.’
AJ Bell’s Mould said: ‘Ocado needs to show off its capabilities, yet its track record has been blemished by two fires at its fulfilment centres in recent years after its robots collided, and an ongoing legal battle with AutoStore around alleged patent infringement.
‘As we’ve seen in recent years, this is very much a waiting game. Years into the future, Ocado could be sitting pretty, lapping up a healthy stream of cash from partners using its technology. But for now, it’s all about spending to help set up operations and to make its technology as efficient and clever as possible. Its capital expenditure represents a big chunk of revenue, and it is growing fast, unlike its sales.
‘Investors are getting tired of hanging around for the big earnings breakthrough and its share price has more than halved over the past 12 months.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
