As Ocado earnings disappoint, ought to I purchase the dip?

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Risk reward ratio / risk management concept

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Ocado (LSE:OCDO) shares are down 4% right this moment following disappointing H1 earnings. This compounds a 55% fall within the share worth over the previous yr, as the corporate struggles to maintain the pandemic momentum going. However is there something in Ocado earnings that warrants me shopping for the dip within the share worth right this moment?

Falling income, no revenue

The retail division noticed income fall by 8.3% versus the identical interval final yr. Provided that that is by far the biggest ingredient of the enterprise, it meant that group income dropped by 4.4%.

The autumn in income trickled all the way down to the underside line, with Ocado reporting a loss for H1 of £13.6m. This contrasts to the H1 2021 revenue of £61m. A huge impact right here was price inflation, which is one thing that meals retailers are all combating. Greater prices imply slimmer margins for the enterprise if it chooses to not go all the price improve to the buyer. Or if it’s all handed on, then decrease demand will probably be seen from clients as they discover cheaper options elsewhere.

It’s a double-edged sword for Ocado, and with inflation anticipated to rise farther from the present ranges of 9.4%, I don’t assume the issue is over. If the efficiency is replicated for the second half of the yr, a loss for the total yr appears inevitable.

Some vivid factors

There have been some constructive factors to remove from the report when ignoring the retail division. Each UK and worldwide options confirmed sturdy development in earnings. Heavy focus is being placed on buyer fulfilment facilities (CFCs). Six extra have been opened in H1, which ought to permit the enterprise to be extra environment friendly (as a result of robotics/automation). It also needs to permit the enterprise to supply a broader protection to companions utilizing the websites.

The report spoke about how “every of those CFCs will generate reliable, recurring money flows and enticing returns on capital.” So I’d anticipate that in coming years, their efficiency ought to assist to spice up profitability for the group. This also needs to allow the corporate to additional diversify with completely different sources of income.

Staying on the sidelines after Ocado earnings

I’m not satisfied that I needs to be shopping for the dip within the share worth right this moment, nonetheless. Although the logistics and options arms are rising, the retail division nonetheless accounts for the overwhelming majority of income.

I simply don’t have sufficient confidence that within the close to time period shoppers are going to freely spend money with Ocado when cheaper staple options can be found. I additionally assume the enterprise will wrestle with worth inflation till not less than the top of this yr. The enterprise isn’t paying out a dividend, so it’s not the case that I might be content material with incomes earnings whereas I look ahead to the corporate to flip to development.

On that foundation, I’m staying away and assume that I can discover higher funding alternatives elsewhere.


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