Ocado’s Elusive Profit Chase May Put Brake on Share Rally
Ocado Group Plc, the U.K.’s largest Internet-only grocer, may fail to break into profit this year as sales growth trails the online businesses of the main supermarket chains, putting a share price rally at risk.
Analysts estimate that tomorrow’s full-year results from the Hatfield, England-based company will show a widening loss and don’t anticipate an improvement in 2013. Such an outcome would provide little comfort for investors who have pushed the stock up 21 percent this year, adding to 2012’s 59 percent gain.
“The recent share price increase is setting Ocado up for a fall if it doesn’t deliver the expected growth,” said Clive Black, an analyst at Shore Capital in Liverpool.
While last month’s appointment of former Marks & Spencer Group Plc boss Stuart Rose as chairman and an extension of its main debt facility in November have boosted investor sentiment, doubts over future prospects persist. Ocado is seeking to overcome a shortage of capacity by opening a second distribution center in central England this year as revenue advances at a slower pace than the company previously predicted.
“We’re very pleased to see Stuart back, but he’s not Merlin the Magician,” said Black, who rates the shares sell. “We may change our mind when they deliver a profit.”
Sales gained 14 percent in the six weeks ended Jan. 6, the online retailer said Jan. 15, trailing the 25 percent growth for U.K. Internet food sales in December, according to data from the Office for National Statistics. That was less than the 20 percent growth that Ocado Chief Executive Officer Tim Steiner predicted at the beginning of last year.
Online food sales rose 18 percent over the Christmas period at Tesco Plc, the U.K.’s biggest supermarket company, and more than 15 percent at J Sainsbury Plc, the third-largest grocer.
Ocado may tomorrow report a pretax loss of 3.9 million pounds ($6.1 million) for the year ended Dec. 2, up from a loss of 2.42 million pounds the prior year, according to the average of nine estimates compiled by Bloomberg. Analysts expect a loss of the same scale this financial year, the estimates show, followed by earnings of about 7 million pounds the year after.
“It’s an important year for them to show investors how the long-term story is coming together,” said Andrew Gwynn, an analyst at Exane BNP Paribas. “We’re not going to see profits this year though and some investors may get a bit impatient.”
Even after the recent share price gains, Ocado stock still trades below the 180 pence at which it was sold in a 2010 initial public offering. Five out of 11 analysts that cover the shares have a sell recommendation with only two buys. Ocado rose 0.7 pence to 104.6 pence at 9:46 a.m. in London trading.
Gwynn raised his price estimate to 140 pence last month and kept an outperform recommendation on the stock, seeing the company as a beneficiary of 15 percent annual growth in Internet grocery retailing while avoiding the dilemma faced by Tesco, Sainsbury, Wal-Mart Stores Inc.’s Asda and Waitrose Ltd. of gaining online customers at the expense of supermarket shoppers.
The online grocer will be “heading in the right direction of profitability,” by the end of this year, said Bryan Roberts, a director at Kantar Retail in London.
“It’s basically an Internet start-up,” Roberts said. “Look at how long it took Amazon to become profitable. If you look at it in Tesco years, Ocado is probably six months old.”
Detractors say the online retailer needs to address a perception among shoppers that its prices are expensive compared with the big supermarkets. Acknowledging this, Ocado has pledged to beat the price of Tesco on comparable baskets of shopping.
Under the company’s Low Price Promise, a basket of groceries is compared to an equivalent order at Tesco.com and if Tesco is cheaper Ocado will give shoppers a money-off voucher for the difference “plus a little bit more,” the company said Oct. 1. It will also honor any promotions or special offers.
“The price perception was a bit of an issue in the past,” Exane’s Gwynn said. “However, if you give enough money off and with the capacity constraints removed, longer term we think it can survive and flourish.”
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