September 19, 2017 / 10:27 AM / a year ago

RPT-UPDATE 2-Ocado's rising costs give ammunition to sceptics

(Repeats to additional subscribers, Reuters pictures now available)

* Flags extra costs of “a couple of million pounds”

* Q3 retail sales increase 13.1 pct

* Still confident of multiple deals in medium term

* Shares fall as much as 7.3 pct

By James Davey

LONDON, Sept 19 (Reuters) - British online grocer Ocado warned that additional investment in developing its distribution centres would increase short term costs, sending its shares lower.

Founded by three former Goldman Sachs bankers in 2000, Ocado has divided analysts like few other stocks and the latest comments are only likely to fuel the debate.

Advocates regard its home deliveries from giant distribution centres as the future of grocery shopping, but critics see a costly and complex venture that will not make sustained profits.

Ocado said it was raising capacity at its third high-tech Customer Fulfilment Centre (CFC) in Andover, southern England, while also preparing its fourth, and largest centre in Erith, on the edge of London, that is set to open in 2018.

This meant the firm would incur “a couple of million pounds” extra costs this year, said Chief Financial Officer Duncan Tatton-Brown, noting higher expenditure on software and engineers.

He said capacity at Andover had doubled since July.

“Because it’s a new design our priority has been to make sure its reliability and resilience are as high as possible,” he told reporters.

Prior to Tuesday’s update, analysts average forecast for 2016-17 earnings before interest, depreciation and amortisation (EBITDA) was 92.5 million pounds ($124.6 million), up from 84.3 million pounds made in 2015-16.

Analysts at Numis cut their current year forecast by 3 percent to 90 million pounds, though they did retain their “buy” rating on the stock.

Bernstein analyst Bruno Monteyne said the market was underestimating the margin impact of setting up new facilities.

“In our view profit expectations for 2018 and beyond will need to come down further,” he said.

Ocado’s shares fell as much as 7.3 percent and were 4 percent lower at 289.5 p by 0915 GMT.

The stock has had a rollercoaster ride since listing at 180 pence in 2010. Prior to Tuesday’s update, the shares had risen 14.4 percent in 2017.


Amazon’s takeover of Whole Foods is likely to lead to increased competition for online grocery shopping in Britain.

Partnerships with retailers overseas are seen by analysts as the key influence on the stock market valuation of Ocado, which has a UK grocery market share of 1.4 percent.

In June Ocado clinched a long awaited first overseas licensing deal with an as yet unnamed European retailer, though it was for software only.

“Given market developments, our own progress and the extra resources we’re putting in place, we’re confident in our ability to sign multiple deals over the medium term,” said Tatton-Brown.

He declined to comment on activist investor Crystal Amber which wants Ocado to focus on being a technology company after taking a stake in June.

Ocado, which sells products supplied by upmarket grocer Waitrose and also has its own distribution agreement with Morrisons, Britain’s fourth largest supermarket, said it was growing sales at a rate ahead of the industry average and saw a slight acceleration in its latest quarter.

Retail sales rose 13.1 percent to 312.7 million pounds in the 13 weeks to August 27, its fiscal third quarter, having increased 12.5 percent in its first half.

Average orders per week increased 16 percent to 254,000, more than offsetting a 1.2 percent fall in average order size to 106.25 pounds. ($1 = 0.7421 pounds) (Editing by Paul Sandle and Keith Weir)

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