The FTSE 100 company is between a rock and a hard place, and a massive increase in losses last year has brought out the sellers again. Our head of markets explains what's going on.
Ocado Group (LSE:OCDO) is caught between a rock and a hard place, as the two elements of its business continue to face different tests.
The Solutions business, on which most of the group’s hopes for future growth and profitability is pinned, has yet to deliver on a sufficient scale to appease investors. The promises of large-scale adoption for its cutting-edge technology has yet to fully materialise, after some considerable time, which has led to investors shunning the stock in their droves. Over the last two years, the share price has fallen by 72%.
Yet progress is evident in this part of the business. UK solutions revenue grew by 13% to £802.7 million in the 52 weeks ended 27 November, while the International unit saw revenues spike by 122% to £148 million. The latter continues to run at a loss, however, leading the group to attempt to accelerate the rollout of its Ocado Smart Platform to partners.
Over the last year, 12 new sites were opened, with 23 now live split between 12 overseas and 11 in the UK. Further deals were signed, most notably with Lotte Shopping of South Korea, and Ocado maintains that the new partner pipeline is strong and that further OSP deals are being sought.
For the Retail business, from which the vast majority of revenues are currently derived, the environment is getting tougher. The so-called “Covid unwind” has had an impact as shopping habits normalise, while given some UK economic hardship, customers have begun to seek cheaper product offerings elsewhere. It is also evident that while customers are still coming to Ocado, it tends to be more selective.
As such, even though active customers rose by 13% to 940,000, average basket sizes falling from £129 to £118, leaving the Retail part of the business with a 3.8% decline in revenues to £2.2 billion, marginally shy of expectations.
The group overall is therefore struggling to make profitability sustainable, and further heavy investment into the technology required to drive the group’s unique appeal continues to drain resources. For the year as a whole, overall revenues grew by just 0.6% to £2.51 billion, again slightly shy of estimates, while earnings losses of £74.1 million compared to expectations of £66 million, and was a far cry from the previous year’s profit of £61 million.
Pre-tax losses therefore ran to £500.8 million, compared to £176.9 million the year previous, and as time progresses the pressure on the Solutions business to deliver will intensify. The group has access to £1.6 billion of liquidity, which should fund its immediate expansionary requirements, although a rise in the net debt figure from £360 million to £577 million is a reminder of the funding which the group needed from shareholders to keep the project firing.
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In terms of outlook, a particularly bright spot is that Ocado expects revenue growth of over 40% in the coming year from its OSP business. Investors will be keeping a close eye out for any new partnerships which could accelerate the longer term desire for self-sustaining revenues. In the meantime, any thoughts of shareholder returns are on the distant horizon, with the need to move to growth and profitability firmly at the top of the agenda.
Ocado’s unique technology has excited investors and to some extent continues to do so. However, patience has been wearing thin with the increasing danger of it becoming regarded as a perennial “jam tomorrow” stock.
Over the last year, and despite a temporary spike after the announcement of the Lotte deal, the shares have declined by 53%, as compared to a gain of 6.4% for the wider FTSE100, with the shares under further pressure in opening exchanges today, down 8% shortly after the open. Meanwhile, the market consensus of the shares also reflects some uncertainty on immediate prospects, and comes in at a 'hold', albeit a strong one.
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