Shore Capital warns of "vulnerabilities" in Ocado's business model

1st Jul 2014 11:29

A swing into black at Ocado wasn't enough to change Shore Capital's negative stance on the stock, saying it sees "vulnerabilities" in the online grocer's business model.Shore accepted that Ocado broadly met estimates with an interim pre-tax profit of £7.5m, compared with a £1m loss previously, though gross sales growth of 15.6% to £442m was a little light of its forecast. Earnings before interest, tax, depreciation and amortisation (EBITDA) grew 78.6% to £34.3m, as expected."Ocado speaks of an 80% increase in EBITDA year-on-year, which is code for just how low profitability has been for so many years, remember this group has been going for thirteen years," said Mike Stewart, Online and General Retail Analyst at Shore.In its outlook, Ocado said it would grow "broadly in line with, or slightly ahead of, the online grocery market".However, Stewart said: "For a small group with a skill set that is supposed to be industry leading, why is Ocado not expecting to shoot the industry lights out? Surely, Ocado should be materially beating incumbent store based operators; if not, this undermines a claim for a premium rating, noting as we do that 15.6% gross retail sales was a little underwhelming to us in H1."He said that Ocado's business provides a good service "but is not a proprietary retailer of any substance to our minds as it depends upon Waitrose (John Lewis Partnership) and Morrisons" - and warned of a potential loss of the relationship with Waitrose, a further tightening industry gross margin and lower delivery fees driven by Morrison and Tesco's online push.Stewart reiterated his 'sell' rating on the stock, saying it is not a "disrupter in the UK grocery market because it is irrelevant within the £175bn industry".The market also gave a negative reaction to the results on Tuesday, with the stock down 3.7% at 357.7p by 11:02.BC