When Ocado Group PLC (LSE:OCDO) warned on profits this morning it led to yet another round of “jam tomorrow” headlines.
It was only a few months since a similar account of plum preserve postponement featured on this website, with words of warning about the effects of cost inflation and the squeezed consumer in May and March – oh and even back in February too.
In a contrarian way, with everyone groaning in frustration (or amusement) it was tempting to look for some positives in today’s statement from the UK online shopping joint venture with Marks and Spencer Group PLC (LSE:MKS) – and there were several.
But it is maybe not so contrarian after all as there seem to be a lot of investors who have been doing similar over the past few years, buying the Ocado dip in the hope or belief that it was the last profit warning.
Or just having seen the way it works over the past decade: that for every few missteps there will be an apparent giant leap (or a small dollop of jam, to extend the confiture analogy): a big new contract, a robotics development, or a bullish broker note.
Since freefalling all the way down onto a four-year low after May’s warning, the shares have enjoyed several spikes of around 15% to 25% as investors have looked to catch the rubber knife.
Small teaspoons of jam in the trading update included a swing to quarterly sales growth after revenues fell in the first and second quarter, while average orders per week were up 10.7% on a year ago and active customer numbers grew 23% to 946k.
What’s more, there is a lot of extra capacity to come from new warehouses (consumer fulfilment centres – CFCs) and its smaller Ocado Zoom city-centre depots. Around 225,000 orders per week of spare capacity based on the circa 600,000 total available after four new CFCs were opened since the beginning of 2021, plus Zooms in Canning Town and Leyton in London and two more outside of London in coming months.
However, on the ‘no jam for you’ side, average order value (AOV) was down 6% year-on-year, rising operating costs are expected to hit margins in the second half, with the competitive and economic environment also expected to impinge upon sales and profit margins.
Also, having plenty of capacity does not seem ideal when heading into a recession, while the investment in the Zoom platform comes at a time when many specialists in this channel have collapsed after the peak pandemic demand died down.
Although acknowledging joint ventures do not tend to last in perpetuity, a bid from M&S for the other half of the JV is unlikely any time soon, reckons long-time follower Clive Black, head of research at Shore Capital.
“Given the current consumer environment in the UK, that is a deepening recession to which Ocado does not seem to be immune, and Marks & Spencer equity has been marked down, plus the ongoing plan to build out the fulfilment infrastructure, we do not anticipate any moves around ownership anytime soon.”
Black’s jam-denying conclusion is that “quite simply, it is a business model that has not, does not and is not expected to make a satisfactory financial return measured on any conventional and rational financial metrics.”
That said, and despite the sustained absence of profits, free cashflow or return on capital, the stock “has a supporters’ club of investors that means its share price continues to defy gravity”, Black says.
But perhaps patience is wearing thin for some of these, with shares sinking to their lowest level since May 2018.
With ten overseas supermarket groups, including Canada’s Sobeys, Australia’s Coles, America’s Kroger, Sweden’s ICA, France’s Groupe Casino and Spain’s Alcampo, all partners of Ocado’s tech arm, Ocado Smart Platforms (OSP), and they “could be forgiven for wondering whether their online push will be a profitable one” after the announcements seen in the UK business this year, said Russ Mould, investment director at AJ Bell.
This will be especially so, Mould reasoned, if Ocado Retail cannot seem to turn a profit in the densely-populated UK, and with the countries of most of its overseas customers, much bigger and so involving greater delivery distances,
“Shareholders in Ocado plc will be hoping that the overseas revenues from OSP licensing partners start to roll in, because even its much-diminished market capitalisation of £5.6bn will be hard to justify if not.”
Profits have eluded Ocado for all but three years since it was founded in 2000 and floated in 2010, with aggregate losses of over £600mln after tax since listing and three cash calls totalling more than £1.5bn in that time.
“So the money is really flowing the wrong way, from an investor’s point of view,” said Mould.