Ocado Group plc (LSE:OCDO) experienced a notable decline in its share price, dropping by 9% on February 26, 2024, following the release of its fiscal year 2025 (FY25) annual results. This decline marks a staggering 92% loss in market value since September 2020, prompting questions about the future of this FTSE 250 stock.
The company operates primarily through two business segments: its online supermarket, Ocado Retail, which partners with Marks and Spencer, and its Technology Solutions division, which provides robotic warehouse solutions for international grocery chains such as Kroger in the United States, Aeon in Japan, and Coles in Australia. While the online supermarket segment has struggled, the Technology Solutions division has been regarded as the area with the most growth potential.
The peak of Ocado’s share price coincided with the surge in online grocery deliveries during the pandemic. Since then, the company has struggled to reassure investors that its capital-intensive business model can yield consistent profits. Recent decisions by partners like Kroger and Sobeys to close underperforming customer fulfillment centers (CFCs) have further dampened investor sentiment, leading to a 37% decline in share price over the past six months.
FY25 Results Overview
Despite the challenges, Ocado reported a 12.1% increase in revenue for the 52 weeks ending in November, amounting to A£1.36 billion. Both divisions—Technology Solutions and Ocado Logistics—contributed to this growth, with a total of 72 million orders shipped globally, representing a 26% increase in weekly CFC volumes. However, the addition of only four new modules to CFCs in the US, UK, and Poland highlights the limitations in expansion.
The company’s financial struggles are evident in its substantial losses. While adjusted EBITDA rose by 59% to A£178 million, Ocado still recorded an adjusted loss of A£353 million. Management anticipates that the business will turn cash flow positive in the latter half of this year, with a goal of achieving this consistently by 2027. They expect to add up to 25 new CFC modules in the coming years, which could help mitigate the impact of recent closures in North America.
Future Prospects and Strategic Moves
To address its financial issues, Ocado plans to implement cost-cutting measures, including the elimination of 1,000 jobs, which represents approximately 5% of its global workforce. Most of these job cuts will occur at the company’s headquarters in Hertfordshire.
On a more positive note, the conclusion of exclusivity agreements in many international markets allows Ocado to explore new partnerships and growth avenues. However, the hesitance of many overseas grocery chains to adopt automated solutions in favor of traditional fulfillment methods poses a challenge. The recent downsizing actions by Kroger and Sobeys are unlikely to inspire confidence among potential partners.
While Ocado’s share price currently hovers just above £200, the potential for a rebound remains contingent on securing new contracts and achieving positive cash flow. Investors are advised to weigh the risks of ongoing losses against the possible benefits of future growth.
In conclusion, while Ocado has shown some signs of growth, the uncertainty surrounding its business model and the current market sentiment may lead investors to consider other options within the FTSE 250 for potentially better returns.
