Ocado’s share price slumped to wipe out all its pandemic-driven gains this week after continued investment in technology saw losses balloon and guidance was lowered for 2022.
Group revenue for the 52 weeks to 28 November increased by 7.2% to £2.5bn and was 42.3% higher than in 2019 after a bumper 2020. Ocado Retail, its joint venture with Marks & Spencer, saw sales grow 4.6% to £2.3bn despite “material headwinds” in its second half.
However, an 11.9% increase in orders was offset by a reduction in basket size of 5.8%, and was constrained in the second half by the tight labour market in the UK and reduced capacity at the Erith CFC following a fire in July.
Meanwhile, distribution and administrative costs spiked by more than £160m to £976.7m to support UK and international expansion, meaning Ocado’s statutory loss before tax jumped to £176.9m from £52.3m.
It was Ocado’s downbeat guidance for 2022 that ultimately drove the sharp share price fall. Despite predicting a return to mid-teens revenue growth, it forecast lower EBITDA margins as it builds capacity, higher central costs and a further £800m of capex to fund international growth.
Shore Capital’s Clive Black branded the outlook “an effective profits warning”. “There is no positive offset of recent transactions and just spend, spend, spend with limited return. We sense that further capital will be needed to sustain such investment set against such cash burn.”
Having topped 2,800p a year ago, Ocado shares slumped 12.9% to 1,225p, falling back to pre-Covid levels of 2020. AJ Bell suggested the slump pointed to “investors getting tired of hanging around for the big earnings breakthrough. Ocado has developed a reputation for being all talk and no profit,” the broker said.
However, Jefferies suggested the sell-off was overdone. “The fundamentals have not changed and the tech investments will pay off quickly,” it said. Ocado also retains “exciting upside levers”, including increased value for CFCs from new tech, the potential for new orders and an untapped opportunity in non-food. “The current price represents a great entry position,” it said.
The shares rebounded 6.1% to 1,300p on Wednesday, but remain down 47.5% year on year.