What the analysts say: Ocado losses narrow but jury out

By Katy Askew | 7 February 2013

City unconvinced by Ocado proposition

City unconvinced by Ocado proposition

UK online retailer Ocado reported smaller full-year losses this morning (7 February). And, with its second distribution centre looking set to open this month, the grocer seemed optimistic that it will be well-placed to take advantage of the interest in e-commerce that has come to mark the UK grocery sector. However, there were those in the City that remain decidedly unconvinced.

Panmure Gordon analyst Philip Dorgan

"FY2012 was another difficult year for Ocado. It failed to deliver accelerated sales growth and it needed to raise money. On sales of nearly GBP700m, ignoring exceptional costs and including capitalised costs, it makes just GBP1m of profit. We think that the debate now moves on to whether its assets are attractive to either Marks and Spencer or Morrisons and, if so, at what price?"

Shore Capital analyst Darren Shirley

"Ocado's stock has appreciated nicely from its recent low since its fund raise in November 2012. That injection of equity took 'heat' off management, so providing it with room to try and prove that this is a business that can make a satisfactory return for shareholders. In the intervening period Ocado delivered what we deemed to be a rare piece of good news with the announcement of the appointment of Sir Stuart Rose as the group's new chairman from May 2013.... [However] we believe Ocado's centralised fulfilment model is too far away from its customers. More to the point, the rise of click and collect (C&C) from the supermarkets represents an increasing competitive challenge for Ocado as does the growing momentum in its online space of Waitrose. So, do we expect margins to materially build any time soon to make the Ocado model produce more satisfactory returns? Well, no."

Matt Piner, research director at Conlumino

"There is no doubt that Ocado is making progress. It continues to hone the efficiency of its innovative delivery model, tap into the growth of online and mobile shopping and build its brand and range of products. However, in an intensely competitive sector, its weak profitability remains a concern....The challenge for the e-retailer remains whether it can actually take advantage of all these opportunities in a comprehensive and profitable fashion. It is facing some pretty hefty rivals in its core market and, in a multi-channel world, Ocado's lack of stores could end up being the decisive disadvantage. In contrast the likes of Tesco, Asda and Sainsbury's can be adaptable in meeting in consumer demands, with an example being Tesco fulfilling 5% of orders through its click-and-collect drive-through service over Christmas. At present, this flexibility remains out of Ocado's reach.There is no doubt that Ocado is a progressive, forward looking business. However, it is difficult to see how it can continue to improve sufficiently without some sort of partnership with a bigger competitor."

Sectors: Financials, Multichannel, Retail

Companies: Ocado, Marks and Spencer, Morrisons, Waitrose, Tesco, Asda, Sainsbury’s

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What the analysts say: Ocado losses narrow but jury out

There is currently 1 comment on this article

If investors considers Ocado just another online grocery business, they may find it a bit overbought and expensive.

Ocado however is NOT another online grocery shop. The Ocado value proposition is all about the Ocado developed fulfillment services, logistics and IT services. Ocado has, whilst others have laughed of their attempt, engineered a very refined support system that will take care of not only their costumers daily groceries, but anything they can stock and deliver in a lorry. and that without involving 3rd party in any of parts of the life cycle. Nothing less than brilliant that is, and it has bought Ocado probably 3 years ahead of any serious competition.

We all know that groceries are moving online. Still if you as investor asked any of the existing shop based grocery retailers to move to an entirely online model to adapt to lower margins, it would take any of the large chains 5-7 years to become profitable as these in their current model are fully dependent on their shop infrastructure.

How Ocado over the last many years have been able to develop this shop-less delivery capability without any other players trying to catch up using the same model is beyond me...... Brilliant strategy, excellent execution and soon to come, fantastic results. Top marks....

 

Carsten Ringsing said at 6:08 pm, February 7, 2013

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