Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Ocado - losses worse than expected as retail volumes drop

Revenue rose 0.6% last year, to £2.5bn, driven by UK Solutions and Logistics and International Solutions.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Revenue rose 0.6% last year, to £2.5bn, driven by UK Solutions and Logistics and International Solutions. Retail revenue fell 3.8% to £2.2bn, reflecting weaker trading because of the UK cost-of-living crisis and the unwinding of the increase in online shopping during the pandemic. This led to a drop in volumes, despite a 13% increase in active customers.

Across the Solutions businesses, the group opened 12 sites in the year, including nine Customer Fulfillment Centres (CFCs). Two new partnerships were signed.

There was an EBITDA (cash profits) loss of £74m, largely reflecting the swing to a loss in Retail compared to profit of £150.4m last year. Losses were worse than the market expected.

Including lease obligations, Ocado had net debt of £577.1m at the end of the period. There was a free cash outflow of £640.9m.

The group expects "marginally positive" EBITDA from Retail in the new financial year. Capital expenditure is expected to fall at least £250m.

The shares fell 7.1% following the announcement.

View the latest Ocado share price and how to deal

Our view

There's no way to describe Ocado's full year results other than disappointing. Losses were worse than expected and it's unclear how quickly the Retail business, which is half owned by M&S, is going to improve.

Ocado Retail is the business behind the delivery vans you'll see on roads nationwide. Grocery inflation is hovering around 17% 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 able to attract new customers, but volumes are falling. That partly reflects the unwinding of big-basket shopping during the pandemic, but also speaks to changing product preferences during the cost of living crisis.

It's very unclear when conditions will improve for Ocado Retail - some of the changes in consumer behaviour could be permanent.

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.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 28th February 2023