- While Ocado’s sales have continued to rise, a healthy profit remains elusive
- Making internet supermarket shopping profitable has always been tricky
Investors have been ramping up bets against Ocado as the online grocer struggles to turn a profit and speculation over its future persists.
It comes as Ocado finds itself on the precipice of relegation from the FTSE 100 after six years, with its share price almost halving since the start of 2024.
Ocado is now the second-most shorted London-listed stock, behind oilfield services group Petrofac, with 8 per cent of the firm’s shares held by investors betting against its value – the highest level in six years.
Among those with large wagers against the FTSE 100 company are Kintbury Capital, D1 Capital Partners, and BlackRock Investment Management, regulatory data shows.
Ocado Retail joint venture continues to underperform
A healthy profit remains elusive for Ocado, which reported a £394million loss for the 12 months ending December and a £581million loss the year before despite its sales continuing to increase.
The bulk of the issue rests with its Marks & Spencer joint venture, Ocado Retail. Making internet supermarket shopping profitable has always been tricky due to the vast infrastructure and logistics costs of building a sizeable operation.
Many of these costs relate to the ‘last mile’ problem – the expensive, inefficient and time-consuming delivery of goods from the warehouse to households.
Ocado has also suffered a slowdown since the end of lockdown curbs that had put a rocket booster under the online shopping sector, and its share of the UK grocery market remains low at just 1.8 per cent.
The company’s sales jumped by nearly a third to £2.33billion in 2020, but annual growth slowed to 7.2, 0.6 and 9.9 per cent in the following three years, respectively.
Its operating margin has plummeted by an average annual rate of -77.8 per cent over the past five years.
Analysts question whether Ocado will ever turn a profit again, having only achieved three – on a pre-tax basis – since being founded in 2000.
Guy Lawson-Johns, an equity analyst at Hargreaves Lansdown, says: ‘Ocado has an amazing product, but ongoing uncertainty about when it will become profitable is fuelling bets that the valuation will take further knocks.’
He adds that ‘it’s not hard to see why investor confidence is waning,’ given the firm is burning so much cash while its capital expenditure levels remain high.
Ocado’s tech business shows ‘big potential’
Ocado’s non-retail operations, Technology Solutions, are a key driver of the group’s valuation but come at the cost of substantial investment.
The unit helps other retailers with their online offerings and provides its robotic warehouse technology to businesses around the world. Analysts keep a keen eye on new contract flow.
Ocado’s most recent management outlook guidance for Tech Solutions pointed to 11 new customer fulfilment centres over the next three years, missing City forecasts of 12 or more as the unit lost money again in 2023.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘Deals are also not being signed as fast as investors were hoping on for its future growth engine, Solutions.
‘There’s still big potential here, but timeframes of growth look more questionable, and that’s knocked the valuation.’
M&S spat hangs over Ocado shares
Ocado has also angered some shareholders by handing its chief executive and co-founder, Tim Steiner, a compensation package worth up to £14.8million.
Almost 20 per cent of investors voted against the plan at the group’s annual general meeting last month, following opposition from proxy adviser Glass Lewis and activist organisation ShareAction.
Under the plan’s terms, the former Goldman Sachs bond trader would get a bonus worth up to 1,800 per cent of his base salary should shares hit £29.69 in three years and certain performance measures are struck.
If this share price is not attained, he could still earn around £5million on top of his base pay if other performance and investor return goals are fulfilled.
Failure to meet targets is at the centre of a payment dispute with Marks & Spencer, further undermining faith in the Hatfield-based company.
When M&S bought a 50 per cent stake in Ocado’s UK retail operations in 2019, it gave the firm £560million upfront and promised to pay a further £190.7million if it reached specific performance-based objectives.
In its full-year results, Ocado acknowledged that the joint venture did not attain the goals required to automatically receive the final payment.
Accounting rules estimate the payment should total just £28million, a figure Steiner described as ‘ludicrously low’.
Ocado has threatened M&S with legal action, claiming the tie-up deal allowed for the targets to be adjusted based on certain management decisions and actions taken during the Covid-19 pandemic.
Lawson-Johns says the fight had been an ‘unwelcome distraction’ for Ocado, given shareholders’ impatience with the business.
After peaking at 2,914 pence in September 2020, Ocado shares have since tumbled to just 404p as the retailer has accumulated vast losses.
‘Usually, when a stock is down nearly 90 per cent in nearly four years, it is for a pretty good reason,’ says Sam North, a market analyst at trading platform eToro.
Takeover speculation keeps investors interested
The plunge has led many to believe the company is a potential takeover target; Amazon was reportedly considering a bid last summer as part of efforts to expand its UK grocery arm.
However, the retail giant denied that it was eyeing Ocado and many investors questioned who would want to buy the business due to its cash flow problems.
There is a renewed frenzy of acquisition activity involving London-listed firms, which are perceived as undervalued relative to their global peers.
If a suitor decides to make an approach for Ocado, this will deal a minor blow to the many short sellers who have done so well in predicting the group’s share price falling, but benefit those who lately bought the company’s shares.
North says: ‘Any decent move higher would lead to significant returns for those looking to buy now. For example, if someone bought today and shares traded back to July 2023’s highs, it would be a nearly 200 per cent return.
‘Is that enough to tempt people? Perhaps, but even then, I would imagine it would be a very small allocation of their capital to avoid the potential value trap.’
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