Ocado's losses widen

Supermarkets are being hit by the cost of living crisis and Ocado (OCDO) is no exception. Consumers tightened their belts and spent less at the tech-focused online grocer, as an increased cost burden pushed the business further into the red.  

Sales at the retail joint venture with Marks and Spencer (MKS) were down by 8 per cent to £1.1bn, with higher customer numbers offset by lower spending from inflation-hit shoppers. Active customers (defined as those who shopped in the last 12 weeks) were up by 12 per cent to 867,000 at the half-year point and are now 9 per cent above pre-pandemic peak. But the average basket spend was down by 13 per cent to £120, and an average selling price increase of 3 per cent to £2.52 was nowhere near enough to deal with this. Retail cash profits plunged by over 70 per cent to £31mn. 

There was brighter top-line news on the solutions side of the business. Revenue more than doubled at the international segment to £59mn, while UK solutions and logistics sales rose by 11 per cent to £396mn. It is also positive that no further financing is expected at this stage after £878mn of liquidity was raised post-period from an equity placing and new revolving credit facility, and that full-year guidance is unchanged.

But a soaring cost burden dragged Ocado down. Distribution costs and administrative expenses were up by 16 per cent to £547mn. The business said this was due to more investment in technology capabilities, a higher spend on support functions, and “significant” cost increases for utilities, labour, and fuel.   

As well as increased costs and losses, there are other headaches for Ocado. The shares have lost over half their value in the last year, with no obvious catalysts at this stage for a revival. Ongoing litigation with AutoStore, which accused the company of patent infringement, led to £11mn of legal costs in the period. And at the end of August, the business will lose Melanie Smith, chief executive of the retail joint venture.

Peel Hunt analysts said that “the fact that Ocado has grown its active customer numbers to above pre-Covid highs means that it will have a bigger base to lean on once the backdrop settles”. That may be true, and it is also good news that retail is gaining market share, but a return to profitability looks as far off as ever. The investment case at this point remains unconvincing. Sell.

Last IC View: Sell, 1,244p, 13 Apr 2022