UK online retailer Ocado saw its share price fall as the group reported a first-half loss despite increasing sales. CEO Tim Steiner said it had been an “extremely busy” first half of the year and said the company remains “well placed” to take advantage of the” accelerating structural changes in the industry”. Analysts offered a mixed view of the results.
Shore Capital analyst Clive Black
“Gross sales in H1 2012/13A were up by 15.2%. Such a sales performance is strong, reflecting the gains that online is making in a reasonably constrained UK grocery market. Whilst this is so, Ocado is not materially out-performing its store based online competitors with the market growing at 15-16% and it may be worthwhile noting that Waitrose [is] expanding its internet grocery business by more than double this rate, albeit from a sales base less than half that of Ocado. The group seems to be somewhat vague about current trade stating, that it is in line with the online market; so we will assume circa 15% still. That said, Ocado is not outperforming its segment.
“EBITDA, Ocado’s preferred operating financial metric because it still does not make anything by way of pre-tax profit, was GBP19.2m. The Group reported an operating loss of GBP1.1m and a pre-tax loss of GBP3.8m (there were £2.8m of exceptional items out with this figure). Even with a retailer (i.e. Waitrose) that has one of the most fulsome gross margins and largest basket sizes in the market, Ocado struggles to make a meaningful and satisfactory return.
“It was a good half behind the scenes. Ocado has just gone through its most successful reporting period as a quoted company, resulting in a marvellous (320%) appreciation in its share price for its investors, and culminating in its interim results.
“Whilst Ocado has surprised us with the nature and extent of the deal that it has agreed with Morrisons, we do not see it as a transformational transaction from a financial and so valuation perspective, particularly given where the shares are now valued. That said Ocado’s share price has often had little relationship to its fundamental financial performance in our view, given that it has not managed to be materially profitable since its commencement more than a decade ago and as we come onto, this remains the case.”
Matt Piner, research director at Conlumino
“Ocado continues to strive for profitability, with a 28.7% increase in EBITDA seeing it register a pre-tax loss of GBP3.8m for the half. Although the retailer continues to gain popularity with shoppers, improve its infrastructure and look to new opportunities, doubts still remain that it will ever achieve significant profitability as a standalone business.
“As more grocery shoppers have turned to the internet, Ocado has been well placed to benefit, allowing it to boost its number of active customers to 360,000 – up from 337,000 in H1 2012. Already boasting a strong reputation for quality, thanks to its tie-up with Waitrose, the retailer has continued to work on its value credentials. As well as its low price promise, an increase in promotional activity contributed to this, with products on promotion now accounting for around 35% of sales, up from less than 30% in H1 2012.”
Verdict Retail analyst Andrew Stevens
“Ocado continues its march on the online grocery market, producing growth in gross sales of 15.2% against a tough comparative. As has become the norm with Ocado, customer numbers, orders per week and average order sizes have all grown. However, the retailer has been unable to reach profitability.
“The Morrisons deal is a much needed endorsement of Ocado’s investment in its supply chain and infrastructure, and the two grocers combined will be able to expand relatively quickly once Morrisons delivery vans start to fulfil orders in January 2014. Ocado should look to explore further strategic partnerships in order to aid sales growth and profitability. However, its focus over the coming year should be on Morrisons, and getting the most out of a deal which will secure its future for some time to come.”