Ocado’s struggles continue as losses mount

Ocado’s struggles continue as losses mount

A spat with key partner Marks & Spencer is just the latest problem to hit Ocado ahead of earnings this week.

British online grocer Ocado Group is facing continued struggles according to its latest annual results. The company reported a substantial £500.8 million pre-tax loss for the 2021-22 fiscal year, significantly worse than the £177 million loss in the prior year and missing analyst forecasts of a £399 million loss.

Ocado has warned that its upcoming full year results on Thursday are not expected to show major improvements over last year's disappointing performance. The company's retail division, accounting for approximately 90% of total revenues, is projected to deliver only mid-single digit sales growth and marginally positive earnings before deductions for 2022-23. This comes after a £4 million loss last year for the Ocado Retail joint venture with Marks & Spencer, as online demand slowed after the pandemic-driven boom.

The retail division is facing headwinds as consumers return to physical grocery stores post-lockdowns. Meanwhile, negotiations are still ongoing between Ocado and M&S regarding the latter's multimillion pound contractual payments owed to Ocado, with no updates expected in the upcoming results. This adds further uncertainty to profitability.

Ocado's technology solutions business, which licenses its automated warehouse platforms to other retailers, is forecasted to show a 40% increase in revenue and positive earnings. However, this smaller division accounts for just 10% of total sales and has yet to offset the mounting retail losses.

As Ocado's losses continue to grow, investors are keen for signs of improvement in the company's path to profitability. But with near-term retail headwinds and prolonged negotiations with M&S, Thursday's final results are unlikely to assuage concerns over Ocado's financial performance and future prospects. The online grocer faces an uphill battle to deliver on its long-term vision and justify its hefty valuation as competition in the sector intensifies.

Technical analysis on the Ocado share price

Ocado’s share price, already down around 33% year-to-date, continues to slide towards its October 2023 low at 446.0 pence ahead of Thursday’s full-year earnings. It does so as it has fallen through its early-February low at 494.6p and closed below this level on Monday, pointing towards further downside likely being seen.

Ocado Weekly Chart

Were the Ocado share price to drop through its 446.0p October 2023 trough, the October 2022, March and June 2023 lows at 403.0p to 342.0p would be back in sight.

Ocado Daily Chart

Resistance above the accelerated tentative downtrend line at 523.8p sits at the mid-February 552.6p high, a rise and daily close above which would put the 200- and 55-day simple moving averages (SMA) at 613.3p to 613.9p on the cards.

For a long-term bullish reversal to be seen the Ocado share price would need to rise above its 798.8p December peak. Such a bullish reversal looks unlikely for the time being, though.

Analysts recommendations and IG sentiment

Fundamental analysts are rating Ocado as a ‘hold’ with Refinitiv data showing 5 strong buy, 5 hold and zero 5 sell - with the mean of estimates suggesting a long-term price target of 851.92p pence for the share, roughly 73% above the share’s current price (as of 27 February 2024).

IG sentiment data shows that 92% of clients with open positions on the share (as of 27 February 2024) expect the price to rise over the near term, while 8% of clients expect the price to fall. Trading activity today shows 68% of buys, this week 71% of buys but this month 56% of sells.