Ocado’s first-half revenue rose 54% to £1.0bn, driven by one-off compensation payments from Kroger and Sobeys for the cancellation and early closure of their Ocado-run Customer Fulfilment Centres (CFCs).
Excluding these payments, first-half revenue rose 1% to £0.7bn and underlying cash profit (EBITDA) fell by 11% to £81mn. Weakness was driven by double-digit declines in Technology Solutions, offset only marginally by slim growth in its Logistics business.
Free cash flow improved from an £83mn outflow to a £75mn inflow, driven by the compensation payments. Net debt, including lease liabilities, fell by £0.1bn to £1.0bn.
Full-year guidance was reiterated, with Technology Solutions revenue expected to be around £0.5bn (2025: £0.6bn). Logistics revenue is expected to grow by a mid-single-digit percentage (2025: £0.8bn).
Several planned CFCs set to open in 2026-2028 have been delayed by 1-2 years.
The shares fell 15.3% in early trading.
Our view
Ocado’s full-year numbers were flattered by compensation payments from Kroger and Sobeys after they scaled back their partnerships. Stripping this out, performance was underwhelming. Further delays to its existing pipeline of new Customer Fulfilment Centres (CFCs) have weakened the outlook, causing the shares to drop sharply on the day.
CFCs are the cornerstone of Ocado’s Technology Solutions division. The group charges third-party retailers to use its robotic systems. Hundreds of thousands of orders are processed each week, with the help of automated 'bots' scurrying around the trademarked grid systems.
Running operations through CFCs offers a host of cost savings and efficiency benefits that could give those who can afford it a competitive advantage. But success relies on having high volumes of orders from shoppers to make these mammoth warehouses worthwhile.
Pressure is mounting on Ocado to establish a long runway of CFC openings, as it’s stumping up hundreds of millions to fund these centres. The group plans to open 6 new CFCs over the next few years. But the timelines for some of these openings have been pushed back again, now expected towards the end of this period, raising questions about the group’s near-term growth outlook.
The Logistics business involves picking, packing and delivering groceries to customers for third-party retailers, like Morrisons. Revenues continue to trend in the right direction, but margins here are slim, so it’s only a small contributor to the bottom line, and profits look set to dip slightly this year.
Ocado Retail, the grocery delivery business half-owned by M&S, is doing well. It continues to gain market share, and volumes are improving as a result. In part, that’s thanks to M&S’ improved quality and value perception, which helps to lure more customers onto the website. While we’re positive about progress in the Retail arm, this division has only just started turning a profit, and it could be a while yet before it’s a major contributor to the bottom line.
The balance sheet isn’t in the best of shape, and expectations of turning free cash flow positive in the second half seem ambitious to us. Major cost-cutting plans are afoot to provide some extra wiggle room, but we can't rule out Ocado burning through its available liquidity faster than planned.
We should be clear - Ocado has an amazing product. However, the group is still loss-making. We can’t rule out further fundraising from investors down the line, which could dilute current shareholders’ ownership. There don’t appear to be many positive catalysts on the horizon, and if upcoming CFC openings don’t happen on time, it could further damage the valuation.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Ocado’s management of ESG risk is strong.
The group has an adequate environmental policy and its whistleblower programme is strong. However, ESG reporting falls short of best practice and the group lacks regular risk assessments on data privacy.
Ocado key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 LSEG. 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.