City snapshot: Ocado shares slump as annual loss hits £500m

Top story

Ocado has posted a statutory loss of over £500m after a slowdown in its retail operations, sharply rising costs and one-off charges hit its bottom line.

The group’s overall revenues increased 0.6% to £2.5bn in the 12 months to 31 December as increased revenues from global technology partnerships was mitigated by a slowdown in its UK retail joint venture with Marks & Spencer.

International solutions revenues were up by 121.9% to £147.8m as the group opened a further eight international CFCs during the period, taking its international sites to 12 and 38 live modules (compared to 12 last year).

UK solutions & logistics revenues were also up 13.0% to £802.7m, despite a 6% drop in UK logistics volumes as significant cost inflation resulted in a 12.5% increase in cost recharges to UK partners, increasing to £630.7m. UK solutions fees grew by 14.9% to £172.0m as a further 12 modules of sales capacity went live.

However, Ocado Retail revenue declined by 3.8% to £2.2bn in “a challenging market” as the group was affected by the unwind of the Covid impact and normalised consumer behaviour, leading to smaller baskets, exacerbated by the cost of living crisis and followed by increased marketing spend to drive growth and relative to pandemic era lows.

However, it said there remained strong demand for Ocado Retail with active customers growing by 13% over the year to 940,000 customers.

It said that under the leadership of new CEO Hannah Gibson, its retail JV is focused on a new “perfect execution” programme in 2023 to drive continued recovery in both revenues and margin, as some of these near-term headwinds ease.

Gross profit and other income of £1,065.0m increased by 2.4% compared with the prior year as the growth in contribution from the higher gross margin International Solutions business offset the reduction in the Retail gross margin.

However, distribution and administrative costs grew by £161.0m to £1,137.7m as the business continues to expand in the UK and internationally.

EBITDA for the period was a loss of £74.1m compared with a £61m profit last year as retail EBITDA fell back by £154.4m.

The group’s statutory loss before tax of £500.8m jumped by £323.9m from the prior year’s loss of £176.9m, reflecting the EBITDA decline and depreciation, amortisation and impairment charges of £348.6m (compared to £240.5m last year) as well as net finance costs of £48.2m and net exceptional costs of £29.9m.

CEO Tim Steiner commented: “Over the last year every company has had its business model tested by a combination of macro-economic and geopolitical headwinds, and I am pleased that, thanks to the creativity and commitment of my colleagues, we have more confidence in our model than ever before.

“We have rolled out CFCs across the world at unprecedented pace for our Ocado Solutions partners who in turn have been able to set the bar for customer experience online, recording industry-beating e-commerce growth in key markets. Our dedicated client support teams are helping our partners to achieve even better results. The pipeline for new partners is strong – in November we were delighted to welcome Lotte to the “Ocado Club” of leading international grocers following the joining of Auchan Polska earlier in the year – and we look forward to opening the first CFCs for our partners in Japan and Australia in 2023.

“Ocado Re:Imagined, our suite of seven game-changing innovations, announced in January last year, is getting ready for rollout. The enthusiasm with which our current and future partners have embraced these innovations demonstrates the link between our Technology R&D and value creation.

“Ocado Retail, our UK JV with M&S, has shown its resilience against a backdrop of higher costs and smaller baskets, reflecting the Covid unwind and the UK cost of living crisis, by growing customer numbers and increasing online market share. As the Covid unwind fades and customer growth continues the business will start to recover the fixed costs of recent capacity commitments.

“Our strong balance sheet gives us the means to finance our growth through the mid-term (4-6 years) by which time we expect Ocado Group to be cash flow positive with the cash flows from existing CFCs sufficient to finance future investments. Over the last 12 months we have continued to deepen our relationships with our partners, and have learnt a lot about how to help them make the most of our world-leading technology. We are confident that we will see the benefits of these learnings in the next few years as we progress our mission to change the way the world shops, for good.”

Ocado has guided to a mid-single digit sales rebound in Ocado Retail with an improving trajectory during the year, reflecting a return to volume growth as the challenging comparison fade.

Technology solutions will see around 40% OSP fee revenue growth as it continues to roll out CFCs, while UK logistics will be broadly stable.

It expects EBITDA to rebound in 2023 too, with positive EBITDA in technology solutions, stable at UK logistics and “marginally positive” at Ocado Retail, albeit retail EBITDA will be negative in the first half and positive in the second half as it returns to volume growth.

Ocado shares have sunk 9.3% back to 567p on the news.

Morning update

Grocery price inflation has soared to a new high of 17.1% as the discounters continue to rapidly take share from the major supermarkets.

The latest grocery share data from Kantar found that inflation hit the highest level it has recorded of 17.1% in the four weeks to 19 February.

That led to a rise in overall take-home grocery sales increase of 8.8% during the four weeks, as price drove value increases despite volume falls, and by 8.1% over the 12-week period.

Aldi pushed its market share to a new record this period hitting 9.4%, remaining the fastest growing grocer, with sales up by 26.7%. It was closely followed by Lidl which increased sales by 25.4%, taking its market share to 7.1%.

Frozen food specialist Iceland also won share, taking 2.4% of market sales, up from 2.3% last year as spending through its tills increased by 10.8%.

Tesco edged slightly ahead in the battle between Britain’s biggest retailers, with sales up by 6.6%. Sainsbury’s and Asda were just behind, with sales rising by 6.2% and 5.9% respectively. Morrisons’ sales decline of 0.9% was its best performance since May 2021.

Waitrose returned to growth, nudging up sales by 0.7%, convenience retailer Co-op increased sales by 3.4% and Ocado put in a strong performance, with sales up 11.3% despite a wider online fall of 0.9%.

Fraser McKevitt, head of retail and consumer insight at Kantar, comments: “Shoppers have been facing sustained price rises for some time now and this February marks a full year since monthly grocery inflation climbed above 4%. This is having a big impact on people’s lives.

“Our latest research shows that grocery price inflation is the second most important financial issue for the public behind energy costs, with two-thirds of people concerned by food and drink prices, above public sector strikes and climate change. One quarter say they’re struggling financially, versus one in five this time last year. If people don’t change how they buy their groceries, households are facing an £811 increase to their average annual bill.”

Shoppers have increasingly turned to own label ranges, with sales of these lines are up by 13.2% this month, well ahead of branded products at 4.6%.

Over the 12-week period grocery inflation was 15.6%, with prices rising fastest in markets such as milk, eggs and margarine.

Elsewhere, wholesaler Kitwave Group has posted a strong rise in annual sales and profits driven by a pandemic recovery and its acquisition of MJ Baker Foodservice in February 2002.

Group revenues in the year to 31 October 2022 were up to £503.1m from £380.7m in the previous year.

Its ambient and frozen & chilled divisions saw combined revenues increase by £59.3m to £378.9m, a 19% increase from the year to October 2021.

The group’s Foodservice division, which was heavily affected by the pandemic, has rebounded strongly and performed well during the period, resulting in more than doubling revenues to £124.1m from £61.1m.

Overall growth included £18.3m of acquired revenue and like-for-like growth of 27%.

Gross profit margin has increased by 2% to 20% during the year due to a mix change with the higher margin foodservice division trading at increased levels and the acquired operations also providing a gross profit margin of 32%.

Its overall adjusted operating profit of £21.5m was up from £7.1m, with all divisions generating an increase in adjusted operating profit margin.

Group profit before tax increased by £15.7m to £17.8m as a result of “margin enhancing revenue growth in the business and the continued drive toward efficient delivery and cost control within the overhead base”.

CEO Paul Young commented: “The strong performance during the first half of the year continued into the second half. We are, therefore, able to report results in line with the upgraded market expectations that were referred to in the interim results, published in July 2022. The Group’s strong performance has continued into the first three months of the new financial year.

“Kitwave has made significant progress, both operationally and commercially during the period, despite the challenging macro environment backdrop. Whilst the Covid-19 pandemic is mostly behind us, its knock-on effects still linger. We remain cognisant of UK cost of living issues, however, the Group is well placed to combat these and, as such, we are confident of a positive 2023 trading period.

“The Board recognises the significant market opportunity within the fragmented UK wholesale market and Kitwave’s strategy is focused on capitalising on this. The success of our acquisitions to date has demonstrated the viability of this strategy, with the Group continuing to look to identify acquisition opportunities to combine with its initiatives to drive organic growth.

“I am confident that the board and management have the expertise and experience to deliver the group’s growth strategy and generate value for the group and its shareholders.”

Private label household goods manufacturer McBride said it had delivered a first half performance in line with its business recovery plan, despite facing a further spike in costs in the period.

It pushed through a further £97.1m of price increases in the period, with inflation adding over £87.6 million of further cost rises.

Despite the prince increases McBride has continued to gain private label market share.

First half sales volumes grew by 1.2% compared to the prior year, with private label volume growth at 2.6%, despite the overall European homecare market in the twelve months to December 2022 seeing volumes fall over 5%, especially in branded products, with a smaller fall of 2.2% for private label products.

Raw material input costs continued to increase, albeit at a slower rate than previously.

Despite a more favourable feedstock environment on plastics and naturals compared to the second half of 2022, increased energy, indirect and labour costs, coupled with large pockets of supply/demand tightness, were key drivers of the increases and more than offset any feedstock-driven relief.

All divisions continued to collaborate with customers to agree pricing actions and product engineering options to offset the inflationary challenges. Price increases agreed over the past 18 months have driven essential recovery in gross margins, but the group said it remains vigilant to the likely need for further price increases in the coming months to offset continuing inflationary impacts, particularly in labour, transport, energy and general supplies.

Overall first half group revenues were up 31.8% to £426.3m.

EBITDA improved, with adjusted operating losses reduced to £1.3m from £14.8m loss in the first half of the previous year.

For the rest of the year, it said the early part of the second half year has continued the momentum seen in the first half and current expectations are for a stronger operating margin performance and a return to adjusted operating profit in the second half of the year.

While positive about the outlook, the group said it also remained vigilant as to the potential impacts of the ongoing and significant macroeconomic uncertainty, particularly around energy costs, high general inflation levels and the knock-on impacts of any escalation of the Ukraine conflict.

CEO Chris Smith added: “The first half year required continued high levels of attention to margin recovery in light of ongoing inflationary pressures. Whilst there are some early signs of stabilisation in certain input costs, many raw material costs remain historically high. Energy and employment costs continue to apply further inflationary pressure, and accordingly, we continue to action mitigations including price increases, product engineering and cost control.

“It is pleasing to have returned to positive adjusted operating profit in the last two months of the period, with momentum improving into the second half as a result of higher volumes from new business wins, better customer service levels and pricing actions fully annualising. All of this is supported by consumer behaviour creating a more favourable environment for private label products.

“The group’s core activities remain strong and the dedication of the entire McBride team to resolve the challenges confronting us is a strong demonstration of our values and the commitment to return the group to sustainable levels of profitability.”

On the markets this morning, the FTSE 100 has slipped 0.3% to 7,910.9pts.

Along with Ocado, fallers include Naked Wines, down 2.2% to 110.1p, Kerry Group, down 2.2% to €90.10 and Virgin Wines, down 1.9% to 51p.

Risers include Wynnstay, up 1.8% to 539.4p, McBride, up 1.7% to 24.4p and Nichols, up 1.6% to 1,007.5p. 

Yesterday in the City

The agreement of a new deal between the UK and EU over Northern Ireland boosted sentiment in the City yesterday, with the FTSE 100 closing up 0.7% to 7,935.1pts after four days of losses.

Associated British Foods was up 1.4% to 1,974p after upping its profits forecast yesterday.

Risers included Naked Wines, up 6% to 112.6p, Domino’s Pizza group, up 5.2% to 286.4p, Bakkavor, up 4.9% to 112.2p, McBride, up 4.4% to 24p, Greencore, up 3.6% to 82.5p and Just Eat Takeaway.com. up 3.4% to 1,816.8p.

Supermarkets were also on the up, with Marks & Spencer up 3.2% to 157.9p, Sainsbury’s up 3.1% to 271.2p and Tesco up 3% to 254.2p.

The day’s few fallers included Haleon, down 0.9% to 323.8p, Nichols, down 0.8% to 992p, Imperial Brands, down 0.2% to 2,065p and Diageo, down 0.2% to 3,598.5p.