Retail

Ocado profits dip as costs of robot warehouses climb


Online grocer Ocado has forecast higher costs and renewed losses as it ploughs money into its business of building robot-operated warehouses for other retailers.

On Tuesday, the group reported a £9m pre-tax loss for the six months to June 3, while saying that it would invest £210m this year, up from £160m in 2017.

Ocado, which has only achieved a pre-tax profit twice in 17 years, also said that adjusted earnings from its “solutions” division that builds its robot warehouses would “decline” as it planned to spend an extra £4m on an associated technology platform.

In the half-year to June, the solutions division lost £2m on this adjusted basis.

Ocado has signed five deals to build warehouses for international retailers, including one inked in May with US supermarket chain Kroger for 20 automated “customer fulfilment centres”. News of that contract propelled Ocado’s shares 45 per cent higher on the day it was announced.

The group’s shares fell as much as 7 per cent in early London trade on Tuesday, before recovering to sit 2 per cent higher at $10.28.

Chief executive Tim Steiner said that while Ocado was spending money on building facilities for retailers, it would become profitable because selling logistics technology was a higher-margin activity than its core business of delivering groceries.

“When selling technology, clearly you make a significantly different profit margin to selling kale,” Mr Steiner said. He added that Ocado would secure recurring revenues from its international warehouse customers “in 18 months to two years”.

Barclays analyst James Anstead took a similar view, saying: “the value of Ocado is based very much on future earnings rather than today’s results.”

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George Salmon at Hargreaves Lansdown agreed. He said that although “half-year profits are behind what had been hoped for . . . for many on the markets that won’t present too much of a problem. With the group in the midst of a dramatic transformation, the investment case at Ocado is all about what lies ahead.”

Ocado is also upgrading its UK distribution centres and software platform, investment which the company said would weigh on earnings this year.

The company has kept the terms of its warehouse deals — which also include France’s Groupe Casino and Sobeys of Canada — strictly confidential. That has made it hard for investors to assess their profitability. Bruno Monteyne, an analyst at Bernstein, said, however, that it was feasible that Ocado’s retail partners would repay 3.5 per cent of the sales they generate from their warehouses to the British group.

Ocado’s shares have risen more than 250 per cent in the past year, pushing the grocer into the FTSE 100 index of blue-chip companies.

The increase means that Ocado’s top executives are on track to share almost £14m in bonuses when an incentive scheme vests next year, the company said on Tuesday.

The group had estimated a cost of roughly £5m for share-based payments for top staff, most of which relates to bonuses that will be awarded next year under its “growth incentive plan” for senior executives.

Ocado said it had taken a £9m charge to reflect the additional expected costs of share-based payments because of the sharp increase in the share price.

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A spokesman said the majority of next year’s payout would be shared by CEO and founder Mr Steiner, finance director Duncan Tatton-Brown, chief operations officer Mark Richardson and general counsel Neil Abrams, although some would go to other managers and staff.

In the half-year to June, Ocado’s overall revenues rose 12.1 per cent on the same period last year to £800m, with the majority of sales coming from its online grocery business.

The retail division’s earnings before interest, tax, depreciation and amortisation — the company’s preferred measure of progression in its profits — were 1 per cent higher at £46m.



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