Ocado prospects questioned by analysts as share price plummets

19th September 2011

The firm reported its first profits in February this year but markets are more interested in the future than the past. Analysts are worried about a slow down in sales growth and a warning that profit margins may be cut as the firm concentrates on boosting service. The share had dropped more 14 per cent to 115p in trading this morning, well below the 180p listing price of last year's flotation.

Ocado says that sales rose 16.9 per cent in the 12 weeks to August 7, down from a rate of 20 per cent in the previous six months.

It also warned that full year profits could fall as the firm invests in improving customer service and increases its warehouse capacity.

FT Alphaville quotes Clive Black of Shore Capital who is distinctly unimpressed.

"One thing is becoming increasing clear, Ocado's business model looks fundamentally flawed and the company should focus on making its first fulfilment centre work before spending hundreds of millions on the next one, especially with competition intensifying."

Then the blog gives its own damning verdict. "What's also clear is the banks who brought Ocado to the market should hang their heads in shame. The company just hasn't lived up to the hype or come anywhere close.

"As noted above the consensus at float was for EBITDA in £86m for 2011/12. Black reckons the outcome is likely to £46.5m. Not exactly the fast growing opportunity it was billed as, eh?" it writes.

Other concerns have focused on aspects of Ocado's relationship with Waitrose. This BBC report notes that Waitross parent John Lewis sold its 29 per cent stake in Ocada in February this year. In July an agreement from Waitrose not to deliver within the M25 area expired, and Waitrose has now beefed up its online delivery service backed by advertising and marketing.

Waitrose has agreed not to deliver from depots but only from stores which may restrict its capacity, but it is also opening a ‘giant virtual store' which could allow it to get round even that part of the agreement.

The BBC says that Ocado remains unconcerned because it suggests that anything that grows the online shopping delivery market should help its business.

However Clive Black is also worried about the number of discounts Ocado is offering. And here is another one.

Marketing Week reports on a new subscription offer from Ocada which gives a 10 per cent discount on about 500 products.

Perhaps better news is the fact it has linked up with French giant supermarket Carrefour to offer French artisan products to the UK market, in a bid to differentiate itself from other online rivals.

But it is the numbers that don't impress the market.

However, investors in Ocado shares couldn't argue that they were not warned.

Here is Money Week's scathing report from just before the IPO in July 2010 worried about the fact that the original investors – three former Goldman Sachs bankers – wanted to get their cash out.

Writing about Ocado's ambition to raise $400m, it offered this assessment: "That's £200m for 'expanding' the business and around £200m for founders that want to bail out. It's not unreasonable to take some cash off the table, but it's hardly a sign of confidence when some founders want to dump all of their shares!"

Earlier that year in February 2010, the Guardian reported the cutting assessment of Ambrian analyst Philip Dorgan. He said: "Ocado begins with an o, ends with an o and is worth zero,", who calculated that since making its first delivery in 2002 Ocado achieved sales of £1bn but racked up pre-tax losses of £321m in doing so."

So far, for unlucky shareholders at least, that warning seems to have been borne out. 

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