Ocado Group Plc shares plunged after the UK online grocery company said its venture with Marks & Spencer Group Plc is struggling to make a profit this year as shoppers pull back amid the worst inflation on record.
(Bloomberg) — Ocado Group Plc shares plunged after the UK online grocery company said its venture with Marks & Spencer Group Plc is struggling to make a profit this year as shoppers pull back amid the worst inflation on record.
The UK e-commerce arm is forecast to be just above break-even this year, and Ocado on Tuesday reported a bigger-than-expected pretax loss of £501 million ($603 million) for the entire company over the past financial year.
The results were a “truly dismal performance,” wrote Shore Capital analysts Clive Black and Darren Shirley. “We continue to look for the rainbow and whether or not a pot of gold is evident. We have our doubts.”
Ocado, which builds robots and software that help deliver groceries online, has had a tough ride over the past couple of years as its business with Marks & Spencer failed to make the most of the opportunity in online retail during the pandemic. Now shoppers are returning to stores and watching their spending with the UK’s cost-of-living crisis sending them to discount supermarkets like Aldi and Lidl. That has saddled the online grocer with too much delivery capacity, leading Ocado to postpone expansion plans.
The shares dropped as much as 10% in London, having lost about four-fifths of their value since their peak in 2020. The stock was the worst performer in the FTSE-100 Index last year.
Chief Executive Officer Tim Steiner is under pressure to boost results as Ocado is awaiting a deferred payment of as much as £191 million from Marks & Spencer related to the joint venture. The amount depends on how well the business does, and Ocado is in talks with M&S over how much of a discount may be warranted due to the weak performance.
The company’s full-year loss also reflects increased investment in Ocado’s solutions business, which builds automated e-commerce warehouses for retailers.
Ocado Retail is pausing the opening of some facilities in the northwest and southeast of England because they aren’t needed, CEO Steiner said on a call. Currently the venture is processing 400,000 orders a week. Once a facility in Luton is added in the second half, the venture will have capacity for 700,000 weekly orders.
“We will grow into the capacity that we built,” said Steiner. “That’s absolutely the challenge for Ocado Retail at the moment. If it were doing 500,000 or 600,000 orders, it would be very profitable, it’s just got too much capacity for its current volumes.”
Customers are shopping less frequently online as habits normalize following Covid lockdowns. The average purchase at Ocado was £118, down 8.5% from a year earlier as shoppers put fewer items in their baskets. The company forecast that the difficult comparisons from pandemic shopping will end in the second half of this year, allowing it to predict sales growth and positive Ebitda at that stage.
In an attempt to boost competitiveness, Ocado Retail announced plans Tuesday to give shoppers future discounts if their purchases of certain products would have been cheaper on Tesco’s website.
Analysts at RBC Europe said they expect the company will need additional financing even though Ocado said it has enough following a £578 million capital increase last year.
The company’s automated solutions business unveiled its latest partnership in November, with South Korea’s Lotte Shopping Co. Ocado said it’s targeting further growth across Asia Pacific. The business has also been boosted by the prospect that US client Kroger Co. will buy rival Albertsons Cos., potentially signaling an increase in the number of automated warehouses Ocado would build for Kroger.
(Updates with M&S payment in sixth paragraph)
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