Just Eat is an unappetising stock

The hedge fund’s key takeaway – if you will – is that Just Eat is a company that is “languishing due to poor capital allocation, failed financial management, and lack of credibility with capital markets”. With the share price down by almost 60 per cent over the last year, it’s hard to argue with the last argument. And with post-pandemic trends and unfavourable consumer and cost dynamics hurting the company’s prospects, it is hard to see where long-term profitable growth is going to come from.   

An unprofitable sector

During the pandemic, food delivery technology companies such as Just Eat and Deliveroo (ROO) enjoyed a boom as hungry consumers, stuck at home and reticent (and at many points unable) to eat out, turned to online app-based ordering. There wasn’t a sudden demand shift to these companies because of anything game-changingly disruptive in their operating models – it was because people in many cases had very limited choices.

Just Eat, like its peers, generates revenues from a range of fees. The company’s order-driven revenues come from commission, consumer delivery, administration, online payment service, and promoted placement fees, while a smaller amount of ancillary revenue is derived from streams including merchandising and subscriptions. Analysts expect robust top-line growth: this year, consensus forecasts are for an impressive-sounding 27 per cent uplift on 2021.

But a big question looms over the sector: if food delivery companies couldn’t turn a profit when we were all locked down at home and plugged into their apps, then when can they?

Bullish investors will point to the capacity for market share gains in a growing market. However, this has been accompanied by a focus on “adjusted” profit measures across the sector, which presents a skewed view of performance. In the three months to 30 September, for example, Just Eat could claim to be “adjusted Ebitda positive”. That’s all fine, if you’re prepared to exclude depreciation, amortisation, impairments, share awards, acquisition and integration costs “and other items not directly related to underlying operating performance” in your measure of operating income. But statutory results are what matters, and the bottom line is in the red. Analyst consensus, per FactSet, is for an inaugural pre-tax profit in 2026.

A key issue is that running costs continue to outstrip sales (see chart below). In the six months to 30 June, Just Eat's operating expenses soared by more than a half to over €3bn (£2.6bn), even before significant depreciation, amortisation, and impairments are factored in. Courier, order, staff, and marketing costs (amongst other categories) have exploded. With inflation and energy pressures nowhere near reversing, and restaurants hiking up prices, it would be foolhardy to think that the company will find it easy to sustainably pass on higher costs.

The company’s splaying of the dough in its fight towards profitability is evident on the balance sheet, too. Just Eat is burning through cash, with cash and cash equivalents down by a third to €882mn in the six months to June, with borrowings broadly static at €2.25bn. Proceeds from the recent sale of its stake in Brazilian takeaway platform iFood will help with short-term cash requirements and 2024 debt repayments, though it is no long-term panacea.

Recent trading

The sector outlook has been made more challenging by the reversal of beneficial pandemic dynamics. Now that we are in the midst of a cost-of-living crisis, consumers’ awareness of the premiums commanded for takeaways versus in-person restaurant dining means volumes are primed for the chop.

The impact of tough trading conditions is already showing. Order numbers in Just Eat's third quarter fell in every geography: by 13 per cent in North America, 3 per cent in Northern Europe, 15 per cent in UK and Ireland, and 17 per cent in Southern Europe and Australia and New Zealand. This represents a chunky decline in custom. While gross transaction value (GTV) was up by 2 per cent, average transaction value was higher, and there were “material improvements” in metrics including revenue and delivery costs per order, the company cut its 2022 GTV growth forecast from mid to low-single digits.

Deliveroo, meanwhile, pointed to a “difficult consumer environment” in its third-quarter update and cut its full-year GTV and adjusted cash profit margin guidance. We currently have the company on a hold recommendation due to its stronger cash generation and market positioning. Analysts at FactSet, also think the company will become profitable on a pre-tax income basis in 2025, a year before Just Eat.

A grubby M&A record

The bull case isn’t helped by the Grubhub deal, which looks like a poorly thought-out piece of business. Just Eat is exploring either a full or partial disposal of the subsidiary and it is unclear what the implications will be for liquidity. This is surely an embarrassing pivot for chief executive Jitse Groen to take, given the platform was only picked up in July 2021 for $7.3bn (£6.1bn). Within a year, that value was impaired by €3bn. While management is optimistic about the growth implications of a partnership with Amazon (US:AMZN), performance has been hit by weak order numbers, fee caps in the US, and the growth of competitors like Doordash (US:DASH). The result has been chunky negative free cash flow.

Better news is provided by the disposal of the company’s holding in iFood, a deal which was signed off at an extraordinary general meeting last month. Just Eat sold its 33 per cent stake for upfront consideration of $1.5bn and deferred consideration of up to $300mn, with the investment valued at a significantly higher level than the market expected. Management plans to use the proceeds to support its balance sheet, a course of action which is much needed. But when it comes to the company’s moves in the marketplace, the larger Grubhub deal is the key concern and this presents Just Eat with serious problems.

A faltering growth narrative

It’s a bad time for a growth company to be mired in such issues. The market’s view on Just Eat hasn’t been helped by investors’ shift away from growth stocks, and concerns around the impact of higher interest rates on valuations. Shares in the loss-making Ocado (OCDO), despite the online grocer’s superior intangible assets and technological edge over Just Eat,  have not been spared this year. Without profits, growth strategies are treated with suspicion.

City analysts have mixed views on Just Eat’s growth prospects. Deutsche Bank analyst Silvia Cuneo is bullish and thinks the company “is well placed to capture profitable future growth”. But Numis analyst Georgios Pilakoutas argues that “without growth, it’s hard to deliver sustainable operating leverage. We therefore still see a need for more drastic action on portfolio re-organisation and cost reduction”.

RBC Capital Markets analysts concluded that “an underwhelming growth outlook keeps us on the sidelines”, though the bank is more bullish on German online takeaway platform Delivery Hero (DE:DHER) due to double-digit forecast growth in gross merchandising volumes. That is something which Just Eat would kill for.

It is difficult to see how the company navigates this mess. Though sales are rising, the accompanying rise in expenses has kept Just Eat as a loss-maker. While the company has made progress in certain areas – such as its new partnership with Turkish ultrafast grocery delivery company Getir – strategic blunders have hurt the business. Despite the significant write-down in the valuation, the disposal of Grubhub seems to be the next course for the company. But investors interested in stable long-term profitability seem likely to remain hungry, as headwinds take their toll.