Ocado cash flow growth ‘not expected anytime soon’
Shore Capital analysts Clive Black and Darren Shirley said: “Meaningful cash flow growth is not anticipated anytime soon, particularly with respect to any relationship with the group’s share price. We continue to struggle with the valuation of Ocado stock against its financial performance and potential in our lifetime.”
Ocado reported gross sales growth of 20.1%, with gross sales in the six weeks to January 5 2014 up by 21.3%, adding up to “a robust start” to the 2013/14 financial year.
Orders increased by 19.1% year-on-year with the order size rising by 0.8%.
‘Evermore formidable competitor’
While Shore Capital noted the improved stock performance under the chairmanship of Sir Stuart Rose, it believed the business would face growing competition, particularly as Waitrose, owned by the John Lewis Partnership, became “an evermore formidable competitor”. The posh retailer’s online grocery business is growing at a rate of 30–40% a year.
It remained to be seen whether Ocado’s collaboration with Morrisons will involve heavy capital investment in more customer fulfilment centres – which had delivered “a less than overwhelming cash return on investment” or more capital light web advice and consultancy, said Black and Shirley.
Shore Capital retained its ‘sell’ advice on Ocado’s stock.
City analyst Conlumino said Ocado deserved credit for “grabbing share of what remains a very competitive sector”.
The retailer’s strong technology platform, intuitive apps and website, and strong performance in areas like substitutions had persuaded shoppers to move more of their grocery spend online or to switch from an online competitor, said Conlumino md Neil Saunders.
“So long as it keeps delivering and stays ahead of the curve, it should be capable of growing its customer base much further,” he added.
‘Could pay major dividends’
If its partnership with Morrisons proved successful, it would provide a blueprint for Ocado to replicate, both at home and abroad, as both a provider of expertise, systems and logistics to businesses, and grocery products to consumers, said Saunders. “Ultimately, we believe this could pay major dividends.”
Tim Steiner, Ocado ceo, said the progress in underlying trading reflected the business’s improved proposition to customers and their increasing desire to shop online.
“We exited 2013 with a strong quarter four performance, which continued into the start of 2014. The seven days leading up to Christmas were particularly strong with sales up nearly 29%, and several days of over £5M of sales, helped by the additional fulfilment capacity that we put in place during 2013.”
He also noted the success of Ocado’s partnership with Morrisons to launch Morrisons.com was on schedule.
But Steiner added that the retail environment remained both challenging and competitive, with consumer sentiment subdued. Ocado would continue to grow broadly in line with, or slightly ahead of, the market, he predicted.
