Ocado Shares Slump as U.K. Grocery Price War Damages Profits

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  • Stock falls as much as 15% as earnings set to miss estimates
  • Amazon encroachment in London will pressure margins: analyst

Ocado Group Plc’s shares fell the most in more than two months as the online grocer said profits will likely fall below analysts’ estimates, showing the effects of a damaging U.K. price war.

Chief Financial Officer Duncan Tatton-Brown said he “wouldn’t be surprised” if analysts cut their estimates for the company’s full-year earnings before interest, tax, depreciation and amortization as persistent U.K. food deflation pressures its margins. The shares dropped as much as 15 percent in London.

Ocado is mired in a longstanding price war with mainstream chains such as Tesco Plc and Wm Morrison Supermarkets Plc, as Britain’s grocers struggle to fend off discounters Aldi and Lidl. The online retailer is also facing heightened competition from Amazon.com Inc, which last week extended its Fresh grocery delivery service across most of London.

“There aren’t many retailers who can turn a blind eye to Amazon turning up in their backyard, and Ocado are no exception,” said George Salmon, an analyst at Hargreaves Lansdown. “Despite higher sales and order numbers, competitive forces are likely to keep margins under pressure for some time.”

Estimate Cut

The company should generate Ebitda of about 90 million pounds ($120 million) this year, according to estimates compiled by Bloomberg. Speaking on a conference call, Tatton-Brown said Ocado continues to expect profit growth this year. Still, Jefferies analyst James Grzinic cut his Ebitda estimate by between 6 and 7 percent to about 86 million pounds as “deflationary pressures had a greater than feared impact,” he said in a note.

Third-quarter sales rose 14 percent, slightly missing estimates, as a 3.4 percent decline in the average order size partially offset a 19 percent uptick in orders per week, Ocado said.

The online grocer also failed to provide any update on a deal to license its technology to an international retailer, something it has been seeking to do for more than three years. “The silence is deafening,” Nick Bubb, an independent retail analyst, said by e-mail. The company remains confident of signing multiple deals with more than one retailer in the medium-term, Tatton-Brown said.