While acknowledging that Ocado was “part of a club that is in demand”, Shore Capital analysts Clive Black and Darren Shirley remained unimpressed by its earning potential. “We remain of the view that Ocado is a distinctive business model, in that it doesn’t work when it comes to earnings,” said analysts Clive Black and Darren Shirley.
Ocado reported gross sales rose by 22% to £227.5M, with gross retail sales up by 18% to £218.8M. But the business has yet to generate profit.
Black and Shirley said Ocado’s business mix – incorporating online grocer, online grocery web-designer and online management consultancy to the grocery trade – was unworkable. The business had failed to generate profits and delivered “derisory returns” through centralised fullfillment of multi-temperature products to a fragmented customer base.
“We remain convinced that this model will not work and that in time there is a greater likelihood than not that both Waitrose (John Lewis Partnership) and Morrisons will walk away from Ocado in our view,” they said.
Meanwhile, Ocado’s competitors were making significant progress. For example, Waitrose’s in-house online grocery capability was growing at a rate of more than 60% year-to- date. A new retail sub-sector of specialist online retailers was now emerging in the UK, said Black and Shirely.
‘Ability to report a profit’
“Such retailers are in high demand from international and domestic investors for good reasons to our minds because they represent the future,” they said. “However, we see a very considerable difference in the business make-up, model, performance and strategic outlook of the likes of Appliance Online, Asos and Boo Hoo compared with Ocado. Not least, is the ability to report a profit and show positive operational gearing.”
Shore Capital maintained its ‘sell’ advice on Ocado stock.
Tim Steiner, Ocado ceo, said he was pleased with the continued growth in the business. “While we are encouraged by our current trading, the retail environment remains both challenging and competitive, and we expect to continue growing in line with, or slightly ahead of, the market,” said Steiner.
Its online distribution partnership with Morrisons – known as Morrisons.com – was making good operational progress, he added.
After its launch on January 10, the service expanded to cover new geographic areas last month.
Last month, the government appointed Sir Stuart Rose, Ocado chairman, to improve management and leadership skills in the National Health Service.