Ocado's half year revenue rose 8.6% to £1.4bn, reflecting growth in all business areas. The group generated cash profit (EBITDA) of £16.6m, compared to a £13.6m loss at the same time last year.
Ocado Retail saw revenue rise 5% to £1.2bn, where higher prices offset a reduction in the number of items bought on average. There was also a "modest" increase in active customers. The division generated a £2.5m loss, although margins improved in the second quarter. The group's third-party logistics business recorded revenue of £335.2m, up 1.7%. Cash profits were broadly flat at £14.6m, reflecting higher costs. Technology solutions revenue rose 58.9% to £198.2, reflecting a higher number of active customer fulfilment sites.
Ocado's free cash outflow of £300m widened, partly reflecting the timing of some payments and changes to seasonal stock levels.
The group's maintained its full year guidance, including "marginally positive" EBITDA from Ocado Retail and total group capital expenditure of £550m. Capital expenditure in the first half was £283.6m, with the majority being spent on the construction of new customer fulfilment centres and investment in the Ocado Smart Platform product.
The shares rose 7.5% following the announcement.
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Our view
As far as the market's concerned, Ocado delivered a stellar set of half year results. Looking under the hood, it's clear progress is being made.
The retail business - half owned by M&S - is doing what it can in difficult circumstances, and performance has picked up. While the group's doing what it can, grocery inflation is rife, and customers are tightening their belts. Ocado isn't a discount name, making it tough to compete in the current environment. The group's still just about able to attract new customers, but people are buying less on average and the group's undertaking price cuts.
While things in this department remain challenging, it's important not to lose sight of the more important area of the business where the investment case is concerned.
Ocado's future growth is in fact focused away from Retail. It's all about Solutions. Ocado Solutions charges third party retailers to use Ocado's robotic systems. Hundreds of thousands of orders are processed each week, with the help of automated 'bots' scurrying around the trademarked grid systems.
There has been increasing demand for the kind of technology Ocado specialises in, allowing it to bring new partners on board. But the weakening economic outlook poses challenges. It puts pressure on existing and potential partners to cut unnecessary spend, and we're starting to see the online boom slow. However, running operations through Customer Fulfilment Centres (CFCs) brings a host of cost savings and efficiency benefits which could offer a competitive advantage for those who can afford it. Ocado's product is market leading. The question is one of demand.
Ocado is stumping up hundreds of millions to fund CFCs. This has led to significant fundraising from shareholders. While Ocado says it believes it won't need further external funding - we aren't convinced that's the case. Medium-term plans for free cash flow generation from existing CFCs seem ambitious to us, and we can't rule out Ocado burning through its available liquidity faster than planned.
Credit where it's due, the fact full year capital expenditure plans remain intact is a relief and signals a better handle of the purse strings. But at some point, investors will want something other than a cash flow statement that's being read like a hawk.
There's also been on-again-off-again talk of potential takeover offers. This is purely speculation, but can't be fully ruled out.
We should be clear - Ocado has an amazing product. It's the only global provider of an end-to-end, online grocery platform. That's an enviable position. As the group builds scale and partnerships mature, profits and free cash should flow. We just aren't convinced this will happen in the projected timeframe, which could result in knocks to the valuation.
Ocado key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
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