Online retailer with ‘pile of debt and falling market share’ says second distribution centre on budget and on schedule
A leading retail analyst has warned that online grocer Ocado is in significant danger of breaching its banking covenants this year, owing to a toxic cocktail of a “pile of debt and falling market share”.
Panmure Gordon analyst Philip Dorgan said it was the “beginning of the endgame” for the retailer that delivers Waitrose and Ocado-branded groceries in its green-liveried vans.
“Standing alone against the largest retailers in the country with a pile of debt and falling market share isn’t sustainable … we believe that Ocado’s days as a public company are limited,” said Dorgan. “It takes only small changes to consensus sales assumptions for a breach to occur.”
The shares, which floated at 180p in July 2010, closed down 2p at 71p. The stock also suffered a blow on Thursday when UBS analyst Mike Tattersall switched his recommendation from “hold” to “sell” and his price target from 110p to 51p. In the note Tattersall said that although a growing number of Britons are buying groceries online there was little evidence that a “tipping point of mass-market adoption is approaching”. In fact there were some signs, he said, that demand was slowing. Waitrose was also emerging as a “credible threat to Ocado at the quality end of the market”, Tattersall said. UBS was one of the banks on Ocado’s float ticket two years ago.
When Ocado, which operates from a hi-tech distribution centre at Hatfield, Hertfordshire, updated the City at the start of the summer, chief executive Tim Steiner said the internet grocer was facing “challenging and uncertain” trading conditions.
Ocado was unable to take advantage when Britons stocked up for the four-day jubilee weekend, during which most supermarkets enjoyed a surge in sales, because all its Friday delivery slots tend to be fully booked.
Dorgan said it was likely that the Olympics had resulted in a “tricky couple of weeks” for Ocado with “consumers favouring big shops and top up shops, rather than online”.
Ocado is investing £210m in a second distribution centre in Dordon, Warwickshire, which will increase its sales potential next year but is stretching its finances. In June its debt stood at £71.3m compared with £19.2m a year ago and some analysts warned the retailer had limited headroom in its banking covenants if trading deteriorated. To remedy the situation management could cut capital expenditure or ask shareholders for more cash.
A spokeswoman for Ocado said the retailer was in regular dialogue with its banks, which were supportive and aware that the construction of Dordon was on budget and on schedule. “We are satisfied that the existing facilities provide sufficient funding for the group to operate for the foreseeable future,” she said.