Bank worried about competitive threat and uncertain Morrisons deal can be replicated
Ocado reported a 21% rise in sales over the festive period on Thursday, but analysts at Deutsche Bank are not impressed.
The online grocer, which has a partnership deal with Waitrose and has recently linked up with Morrisons for the supermarkets own internet delivery service, did caution about the outlook. Chief executive Tim Steiner said in its statement:
While we are encouraged by this current trading, the retail environment remains both challenging and competitive, with consumer sentiment subdued, and we expect to continue growing broadly in line with, or slightly ahead of the market.
And its shares have fallen 26.7p or 5% to 496.8p a day after the figures. They had seen a strong run in recent days, so much so that they would not have that much further to go to make Ocado big enough to be eligible for the FTSE 100. But not if investors take Deutsche's comments to heart.
The bank has begun coverage of Ocado with a sell rating and 440p price target. It said:
Over the past year, the Ocado story has expanded from UK online grocery retailer to international IT services provider. We think the market is placing a high value on the potential licensing income stream while ignoring: 1) the challenge of translating Ocado's success in UK online grocery to other geographies and other product markets for potential licensees; and 2) the downside risk to the UK grocery profitability from increased price competition.
While Ocado will continue to play a key role in the development of the UK grocery market, we expect competitive pressures to prevent the company from capturing the value displaced from store-based grocery. We expect the consumer to reap most of the benefits.
Ocado's sales have already slowed from a five-year compound annual growth rate of 20% to the mid- teens, slower than most pure online retail peers, and Ocado's margin improvement is most reliant on spreading current administrative costs (5% sales) over a larger sales base. We identify some meaningful restrictions on reducing delivery costs, which represent almost half of the cost base.
The Morrisons agreement was a right-time-and-right-place opportunity, which we do not view as representative of what Ocado can offer other retailers in other geographic markets (i.e. ready-made physical capacity and an immediate solution in a proven market).
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