Ocado Group plc (LON:OCDO) delivered a drop in first half pre-tax profit but shares rose as underlying earnings grew more than expected and revenue jumped on an increase in customers numbers.
Pre-tax profit came to £7.7mln in the 26 weeks to 28 May, an 18.1% decrease on the same period a year ago.
The online grocer blamed the decline on increased costs associated with the opening of its customer fulfilment centre (CFC) in Andover, Hampshire and the depreciation incurred for its share of mechanical handling equipment (MHE) assets owned by Morrisons.
Ocado has run the technology and delivery network for Morrisons’ online business since it launched in 2014. Morrisons also uses about 30% of the capacity of Ocado’s CFC in Erith, South East London.
While profits fell, group revenue rose 12.5% to £713.8mln, with retail sales up 12.5% to £659.6mln. The number of active customer edged up 12.7% to 600,000, supported by the shifting trend towards online grocery shopping.
Order volumes gained 15.6% to an average of 2600,00 orders per week, though the average value of the shopping basket dipped 1.4% to £108.45 due to promotions.
Ocado made underlying earnigns (EBITDA) of £45.2mln, up 2.7% on the prior year and compared to analysts' forecasts of £44.8mln.
Shares rose 1.35% to 293.50p in morning trading.
Ocado tackles fierce competition and rising inflation
Ocado said it has had to contend with competitive market and rising import costs after the Brexit vote last June sent the pound tumbling.
“While we have started to see the return of modest inflation in selling prices after several periods of sustained price deflation, the market has remained competitive at a time of continuing cost inflation,” said chief executive, Tim Steiner.
“Notwithstanding, our results demonstrate the superior nature of our operating model which has enabled us to preserve our retail margins and continue to invest in our platform for our own retail business as well as Morrisons and international partners.”
As it invested in its digital offering, Ocado ended the period with cash and cash equivalents of £37.8mln, compared to £52.7mln a year ago, Net debt rose to £210.5mln from £136.2mln.
Ocado expects growth in market share
Looking ahead, Ocado said it expects to expect to continue to grow ahead of the online grocery market.
For the full year, the group has guided toward capital expenditure of £175mln, including costs for expenditure for its CFCs in Andover and Erith and investment in its infrastructure and technology.
Following a £250mln bond issuance and £100mln revolving credit facility shortly after the end of the period, the company said it has £250mln of cash and available undrawn credit facilities in excess of its operating cash requirement to support future growth.
"Grocery retailing is changing and we are ideally positioned to enable other retailers to achieve their online aspirations,” Steiner said.
Steiner said he expected the deal Ocado secured last month with an as yet unnammed European retailer to be "the first of many".
Shore Capital anlaysts Clive Black and George Mensah said in a note to investors: "Notably Ocado continues to focus on diversifying its income streams, following on from the announcement of a software and IP provision agreement with a as yet unnamed European food retailer, the company will also be facilitating Dobbies’ online business from 2018 after announcing a general merchandise agreement with the garden retailer."
The analysts said the recent bond issue further leverages the organisation. "Accordingly, if there was a path to material and sustained profit, earnings and maybe even, dare we say it, dividends for shareholders after seventeen years of project development then we may be more sanguine about the business model," they said.
ShoreCap put Ocado 'under review' with a target price of 289p, saying "relatively unremarkable growth from a rather modest scale is not worthy of lofty valuation multiples, in our view".
"The current multiples perhaps necessitates the execution of further service agreements with other international retailers sooner rather than later."