Stockbroking services firm AJ Bell has said that while online retailer Ocado is right to toast its new business wins for its 'solutions' arm, its core retail operation remains a key revenue driver that should not be overlooked.
“Although Ocado would like to be seen as a technology company, its half year results paint a very different picture," said Russ Mould, investment director at AJ Bell. "It generated 11 times more revenue from selling groceries than supplying technology systems and services.
“Admittedly the business has done very well in the past year by signing up more international partnerships using its software, algorithms and robotics systems. But that’s all about the future. Today is about a company generating sales by delivering food and drink to UK consumers."
Half-Year Performance
Ocado's half-year results, released today (10 July), showed that Ocado's retail revenue rose 11.7% on the same period last year, to stand at £736.6 million. Its solutions revenue was up 16.8% to £63.3 million.
Overall, group revenue rose by 12.1% to £799.9 million. Group EBITDA was £38.9 million, a decline of 13.9% due to increased fixed costs and network investments.
Commenting on its performance, Mould added, "If you were to judge the company purely on its latest numbers rather than what it may earn in the future, then you’ll see a business in mixed shape.
“It still cannot turn solid revenue growth into profit; the average basket value is still slipping in size; yet the total order volumes are increasing. You would normally associate a FTSE 100 company with one making significant earnings but Ocado very much bucks the trend.”
In its statement, Ocado said that it expects retail EBITDA to 'improve significantly' over the course of the second half of 2018, 'partly due to lower engineering costs per order and as the new capacity is utilised at both sites at increasing efficiencies'. Solutions EBTIDA is likely to decline further in the second half of the year, amidst a further £4 million investment in its platform's capabilities.
Commenting on its EBITDA projections, Barclays European Food Retail Equity Research said, 'Clearly the market may not be too worried about EBITDA charges driven by a higher share price – and of course the value of Ocado is based very much on future earnings rather than today’s results. But it does seem likely that there may be some pressure on near-term estimates.'
Solutions Provider
Ocado, which recently signed solutions contracts with Groupe Casino, Sobeys, ICA and Kroger, is understandably bullish about the possibilities presented by its services arm.
Commenting on its half-year performance, Tim Steiner, chief executive, said, "In order to fully capitalise on the opportunities ahead of us, we are working at pace, investing more and focussing sharply on execution to bring on new capacity in the UK and to achieve successful outcomes for our partners.
"We are confident that we have the ability to scale-up the business, deliver on our commitments, drive sustainable growth and deliver value to all our stakeholders."
The retailer has just opened its largest customer fulfilment centre to date, which the company says will be the 'largest automated warehouse for online grocery retail in the world and will showcase the scalability, adaptability and efficiency of our platform'.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine
