Responding to the announcement of the online retailer’s annual results, Black, director and head of research at Shore Capital, who has previously been critical of the firm’s inability to generate profit, said: “Yes, following a decade and a half of trying, Ocado has worked out how to deliver baked beans, ice cream, Jaffa cakes and chipotle chillies without booking a bottom line loss.”
He said he welcomed the news, but cautioned that its ability to deliver material earnings per share or pay shareholders a dividend was still some way off.
Black accepted that the business continued to deliver significant sales growth in a “torrid” grocery market. He also congratulated it for delivering a margin for earnings before interest, taxes, depreciation and amortisation (EBITDA) that was ahead of the major supermarkets.
But he called its earnings before interest and taxes alone “derisory to our minds, given it does not have to support a store estate like its competitors”.
He also questioned whether or not the high number of staff in the company’s technology department, which was set to rise from 550 to 700 in 2015, was an unnecessary financial drain.
Black again pointed out that Ocado’s partnership with Waitrose entailed it paying fees to an entity that was also a competitor with its own online retail service, Waitrose.com.
While he did not necessarily believe Waitrose would sever ties with Ocado “anytime soon”, he added: “…We have to harbour concern for Ocado should Waitrose re-appraise matters in due course, the point being that it is Waitrose that still is in control of the playing of the cards on this commercial relationship.”
In its full-year results statement, Ocado announced further developments to its customer fulfilment centres off the back of strong growth in customer orders.
It confirmed it had exchanged contracts for a 30-year lease for a new build site in Erith in southeast London intended to be a fourth customer fulfilment centre, subject to planning consent.
“The developer is expected to commence work on the site in the first half of 2015, with our works starting in 2016 and with a plan to commence operations during 2017,” it stated.
Investment of £135M
Phased investment of £135M in the new centre would allow Ocado to boost weekly customer orders by more than 200,000, it said.
There would be a further £50M investment in building work on items such as fridge plants, mezzanine floors and additional dock doors to take the developer’s shell up to the level of building required, it added.
Costs and capacity could be shared with Morrisons, as Ocado had an option to use it for Morrisons.com under improved rental terms, it said.
The company said it planned to open its third customer fulfilment centre at the end of 2015. That site would bring in a further 65,000 weekly customer orders, it added, following a capital cost of £45M.
Invest in bagging machines
Three additional purpose-designed and patent-pending bagging machines began operations in its first fulfilment centre during the course of the second half of 2014, it said. It expected to invest in further bagging machines in its first two centres over the coming years.
Phase 2 development works for its second centre were now complete, increasing capacity there to approximately 180,000 orders a week, it claimed.
Ocado reported revenue up by 19.8% in the 52 weeks to November 30 2014 to £948.9M, while earnings before interest, taxes, depreciation and amortisation rose by 56.3% to £71.6M.
Ceo Tim Steiner said: “Overall, we are well equipped to continue to lead the online grocery revolution, in the UK and overseas, as increasing numbers of customers shift away from traditional forms of retailing. We are confident that we have significant opportunities for growth in sales and shareholder value.”