Ocado remains a jam tomorrow stock as losses grow

Despite plenty of success and undeniable potential, the past 18 months has been tough for shareholders. Our head of markets walks us through the latest half-year results for signs of hope.

Despite its best efforts, Ocado Group (LSE:OCDO) for the moment remains a jam tomorrow stock.

Quite apart from the Solutions technology business which effectively remains in start-up mode, the Retail part of the business is now under pressure due to a combination of factors including changing customer habits and pervasive cost inflation.

Accounting for around 90% of group revenues, the stalling within the Retail unit has had a material impact on the group picture, and Ocado has posted an overall pre-tax loss of £211 million for the 26 weeks ended 29 May 2022, compared to last year’s loss of £28 million.

Retail revenues declined by 8% to £1.1 billion, wildly missing expectations of £2.3 billion, with average basket sizes declining and within tough comparatives where various lockdowns were still in place last year. Active customer acquisition grew by 12% to 867,000 and, despite the overall figures being far short, guidance for the full-year remains unchanged.

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More positively, this is a group with an eye on tomorrow. The recent £578 million fundraising exercise was easily filled, suggesting an element of strong support in Ocado’s expansion plans and the group does not anticipate requiring any further financing in the mid-term. The cash generative machines powered by state of the art technology which are the Customer Fulfilment Centres (CFCs) are being rolled out. The fact that only 16 of the committed 58 CFCs are now live gives an indication of potential, with the group targeting over £6.3 billion of revenue within the next four to six years.

At the same time, further tech innovations continue to keep the “Ocado Smart Platform” (OSP) ahead of the game, such as moderations to the bots and grids which should reduce capital expenditure in future site fit outs by 15%, thus boosting margins and ultimately profits. The group now has 11 OSP partners and continues to trawl for opportunities to increase the number using its technology on a global basis, even though this would result in a shorter term hit to its figures.

These results also show real progress on Solutions revenues, albeit from a lower base, and the group as a whole remains committed to delivering expansion, with capital expenditure over the period increasing by 48% to £367 million.

The leap of faith from investors is based on the cash-draining Solutions business beginning to realise its undoubted potential. The growth of further partners, CFCs and technological innovation all bode well, but in the meantime the pressure on this part of the business to make a meaningful contribution increases.

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In light of this frustration, the share price has declined by 55% over the last year, as compared to a gain of 3.8% for the wider FTSE100. Over the last five years, the shares are comfortably ahead although far from the optimistic peaks reached in late 2020 and early 2021.

There clearly remains much going on under the bonnet at Ocado and there could be some profitable times to come, but for the moment the market consensus of the shares remains uncommitted at a "hold", albeit a strong one.