Ocado Group PLC (LON:OCDO) shares slumped after saying this year’s earnings will be hit by costs related to its transformation as it reported a loss for 2017.
The company has been shifting its focus from being an online grocer to supplying other retailers with warehouses and digital commerce platforms. It counts Morrison Supermarkets PLC (LON:MRW) as one of its partners, having run the technology and delivery network for the supermarket’s online business since it launched in 2014.
Ocado said 2018 underlying earnings (EBITDA) will reflect the fixed costs of developing its UK logistics hubs, including a robot-operated warehouse in Andover. The group also plans to open its fourth facility in Erith this year and will invest in developing its digital commerce platform.
Capital expenditure in 2018 is expected to total £210mln.
“We expect the trends in EBITDA to improve significantly in fiscal year 2019,” it said.
To support its investments and secure new international deals, Ocado said it plans to place about 5% of its equity.
Shares fell 6.2% to 461.7p in morning trade.
Full year earnings flat but revenues rise
In the 52 weeks to December 3, Ocado delivered flat EBTIDA of £84.3mln and a pre-tax loss after tax of £0.5mln, compared to a profit of £12.0mln a year ago.
The retail business, which delivers food for Morrison and Waitrose, increased 12.4% to £1.3bn as total order volumes edged up 14.3% to an average of 263,000 per week.
Customers spent less, however, with the average basket size down 0.8% on the previous year at £107.22.
The group also said it was confident of achieving revenue growth in its retail business of 10-15% in 2018 as it expands its capacity and increases its market share in Britain.
Technology division sales grow
The group reported separate results for its technology division, Ocado Solutions, for the first time. Sales from the unit rose 16.2% to £115mln.
On the back of its investment in the technology unit, Ocado secured a partnership with France's Group Casino in November and last month won a deal with Sobeys of Canada.
READ: Ocado signs third international partnership with Canada's second largest food retailer, Sobeys
“We have primed our Ocado Solutions business for growth and received an important validation of the business model through our latest partnerships with Groupe Casino and Sobeys,” said chief executive Tim Steiner.
“Looking ahead, we are confident that we will be able to do further deals with the momentum of new signings building over time."
Ocado needs more deals to justify cash burn, says analyst
Ocado said the last 12 months of the year have been “transformational” for the business but the performance statistics don’t quite live up to the hype, according to AJ Bell investment director Russ Mould.
“It is making barely any profit, active customer numbers are going up but the average basket value is going down,” Mould said.
“It is burning through cash and investors still don’t know whether the international deals announced over the past year will have a material impact on its earnings.
“You could argue it has to spend money to make money in the future, but shareholders have already been waiting patiently for years while it tries to build scale.”
Mould said recent deals might keep investors happy for a while longer but they might start shopping elsewhere unless Ocado starts winning more partnerships and turning a decent profit.