Ocado warning of sustained margin pressure hammers shares

A prolonged fall in grocery prices is pressuring profit margins at British online supermarket Ocado and cut-throat competition shows no sign of letting up, it said on Tuesday, triggering a slide in its shares.

Ocado stock, which has had a rollercoaster ride since its market debut in 2010, had risen 11 percent over the last month after the firm sealed a new distribution deal with Morrisons , Britain‘s No. 4 supermarket. Those gains were wiped out on Tuesday, however, as analysts trimmed their earnings forecasts.

The stock fell as much as 15.2 per cent to 273 pence, valuing the business at £1.72 billion.

“As the market remains very competitive, we are seeing sustained and continuing margin pressure and there is nothing to suggest that this will change in the short term,“ said chief executive Tim Steiner.

Finance chief Duncan Tatton-Brown explained Ocado‘s policy was to follow the major players in the grocery market, including market leader Tesco, on price.

“Therefore when market prices are down our prices are down,“ he said.

But he still expected Ocado‘s sales to grow ahead of the online grocery market, and substantially ahead of the market overall.

Prior to Tuesday‘s update, analysts were on average forecasting full-year core earnings of about £88 million, up from £81.5 million in 2015.

Analysts at Numis, which has a “buy” rating on the stock, cut their forecast to £85.1 million from £87.5 million “recognising that the industry-wide pricing pressure on basket size is likely to weigh on gross margin”.

Ocado, whose range includes products supplied by upmarket supermarket Waitrose, said gross retail sales rose 13.6 per cent to £286.4 million in the 12 weeks to August 7th, its fiscal third quarter. That compared with first-half growth of 13.9 per cent.

Analysts see winning international agreements with retailers in north America and western Europe as the key influence on Ocado's stock market valuation. However, the company missed its target of securing a deal by the end of 2015 and is still to announce one. – Reuters