Ocado share price [OCDO]: positive earnings sentiment burnt by warehouse fire

What should have been a triumphant earnings day for Ocado [OCDO] last week, following positive feedback from analysts and the launch of a new one-hour delivery service, Ocado Zoom, turned into something infinitely more bittersweet, owing to the fire at Ocado’s Andover warehouse.

A huge blaze erupted at the retail company’s flagship automated warehouse on the South Coast of England on 6 February. 

Initially, the news did little to dampen the company’s share price, which had been lifted by its earnings release the day before, however its stock soon fell 6% after Ocado warned shareholders of an expected fall in sales growth until it could shift operations to other locations. Ocado's share price has recovered somewhat since then however, down just 2% after 6 February.

The Andover site represents around 10% of the retailer’s capacity.Ocado stock vitals, Yahoo finance, as at 13 February 2019

Earnings details

The revelation put an abrupt end to the stock’s strong run in 2019, that had brought growth of near 25%. The gains had looked set to continue following the release, which saw Ocado’s retail business up by 12% from £1.32bn to £1.48bn, while the solutions business posted a 15.8% rise from £106.2m to £123m. Overall group revenue was up by 12.3% to £1.6bn.

It’s worth noting that the story is however significantly less rosy when looking at Ocado’s pre-EBITDA earnings which, for the group, fell by 20.7% from £75m to £59.5m.

The post-tax loss column in Ocado’s earnings should also be a major concern for anyone with money in the business thanks to its post-tax losses. A 358.16% rise from £9.8m to £44.9m will concern investors and traders, who will hope this doesn’t become a regular feature of the business’s reports.

Ocado stock vitals, Morningstar, as at 13 February 2019

Ocados’ executives are staking the company’s future on its partnerships, especially after its share price jumped from 545.2p to 901.6p over four days in May following its signing of a deal with American giant Kroger supermarkets. Last year saw four such deals and its recent tie-up with Marks & Spencer [MKS] has even sparked rumours of a potential merger.

Better together

A combined Ocado and MKS brings clear and obvious benefits for both parties. For MKS, the ability to enter the online delivery market is an unbridled watershed moment and one that will surely see its share price rise by more than the 1% it did when the deal was announced on 28 January.

Ocado had received a greater bump in its share price from the deal, growing by 5%. Following the overseas partnerships it made last year and its stock’s uptrend, the deal marks a major coup early in 2019 and one that reinforces and possibly vindicates the board’s growth strategy, while providing a firm base to grow for the rest of the year. 

Ocado chief executive Tim Steiner’s steadfast refusal to confirm or deny rumours of any potential deal is increasingly noticeable, saying that he will “never confirm or deny” talks with other retailers. 

Tech focus

It’s telling that Ocado placed technological improvements at the top of what it considered to be its key milestones last year.

The business is desperate to make a success of the Ocado Smart Platform to build out its robotic infrastructure, notably launching its first Customer Fulfillment Centre (CFC) – bag packing facilities for home deliveries – in Paris, with another being constructed in Canada in partnership with Canadian chain Soebys. 

Kroger, last year’s blockbuster partnership deal, has committed to building 20 CFCs with the first three to arrive in the next three years.

This is all good news for Ocado’s solutions business with revenue from the arm growing by more than a third (37%) from £146.1m to £200.1m year-on-year.

Robotic bag packing had meanwhile been being tested in Andover and it will be interesting to see if development of this technology is also in anyway hindered by the fire.