Ocado (LSE:OCDO) shares are down 4% today following disappointing H1 earnings. This compounds a 55% fall in the share price over the past year, as the company struggles to keep the pandemic momentum going. But is there anything in Ocado earnings that warrants me buying the dip in the share price today?
Falling revenue, no profit
The retail division saw revenue fall by 8.3% versus the same period last year. Given that this is by far the largest element of the business, it meant that group revenue dropped by 4.4%.
The fall in revenue trickled down to the bottom line, with Ocado reporting a loss for H1 of £13.6m. This contrasts to the H1 2021 profit of £61m. A big impact here was cost inflation, which is something that food retailers are all struggling with. Higher costs mean slimmer margins for the business if it chooses not to pass all of the cost increase to the consumer. Or if it’s all passed on, then lower demand will be seen from customers as they find cheaper alternatives elsewhere.
It’s a double-edged sword for Ocado, and with inflation expected to rise further from the current levels of 9.4%, I don’t think the problem is over. If the performance is replicated for the second half of the year, a loss for the full year seems inevitable.
Some bright points
There were some positive points to take away from the report when ignoring the retail division. Both UK and international solutions showed strong growth in profits. Heavy focus is being put on customer fulfilment centers (CFCs). Six more were opened in H1, which should allow the business to be more efficient (due to robotics/automation). It should also allow the business to offer a broader coverage to partners using the sites.
The report spoke about how “each of these CFCs will generate dependable, recurring cash flows and attractive returns on capital.” So I’d expect that in coming years, their performance should help to boost profitability for the group. This should also enable the company to further diversify with different sources of revenue.
Staying on the sidelines after Ocado earnings
I’m not convinced that I should be buying the dip in the share price today, however. Even though the logistics and solutions arms are growing, the retail division still accounts for the vast majority of revenue.
I just don’t have enough confidence that in the near term consumers are going to freely spend cash with Ocado when cheaper staple alternatives are available. I also think the business will struggle with price inflation until at least the end of this year. The business isn’t paying out a dividend, so it’s not the case that I can be content with earning income while I wait for the company to flip to growth.
On that basis, I’m staying away and think that I can find better investment opportunities elsewhere.
