The Ocado Group share price crashed 19.9% on Friday. Can it recover?

The Ocado Group (LSE:OCDO) share price has been a bit of a basket case over the past five years. Since September 2020, it’s fallen 89%. And it didn’t have a good day on Friday (12 September) when it tanked nearly 20%.

What’s going on?

The latest tumble was caused by news that Kroger, one of America’s largest food retailers and Ocado’s only customer in the US, is carrying out a strategic review of its operations.

During an earnings call, Kroger’s chairman told analysts that one of his objectives is “improving profitability and reducing our cost to serve”. No surprise there. But he then went on to say: “We are examining all aspects of our business to drive greater efficiency, including a full site-by-site analysis of our… automated fulfilment network”.

The company says some of its warehouses — the ones in high density areas — are doing better than its others. It’s already using its store network to help fulfil customer orders but it’s now raised the possibility that it might start using more of them.

Not surprisingly, this sent investors into a frenzy and Ocado’s share price plunged as a result.

A big blow

Kroger’s comments are clearly not good news for Ocado. In May 2018, the two signed a deal that provided for up to 20 automated warehouses to be built.

If Kroger does end up closing some of its eight sites, it seems like it’s made an expensive mistake. These warehouses are not cheap. During the 52 weeks ended 1 December 2024 (FY24), Ocado spent £162.6m “primarily” on six customer fulfilment centres (CFCs). This includes two for Kroger that are due to open in 2026.

Ocado’s warehouses are undoubtedly very clever. Robots are used to pick products and all pallet movements are automated. This helps ensure the efficient loading of delivery vans and improve turnaround times.

But it has to convince more customers that CFCs are the way forward if it’s to reverse the steady decline in its share price. At the moment, it has 25 live warehouses with eight in the pipeline. The more CFCs it builds, the more modules (a measure of capacity with one module typically being equivalent to $100m of grocery sales) it sells.

Despite spending hugely on technology, the group remains loss-making. And it’s unclear when it hopes to become profitable. The most immediate target it’s set itself is to be cash flow positive in FY26.

My view

Ocado has developed some innovative technology and provides its customers with some impressive logistics software. Also, online sales are the fastest growing channel in retail. However, I don’t want to invest.

In my opinion, the group remains too focused on its EBITDA (earnings before interest, tax, depreciation and amortisation). This metric is the most prominent in its financial reporting. But it needs to be profitable at a post-tax level to convince me to take a stake. For a technology group with significant borrowings, depreciation and interest costs are important costs that mustn’t be ignored. And last week’s news from Kroger means it could take longer than Ocado’s directors previously thought for the group’s bottom line to move into the red.

On this basis, the stock’s not for me.

The post The Ocado Group share price crashed 19.9% on Friday. Can it recover? appeared first on The Motley Fool UK.

More reading

• 2 falling shares I’m avoiding on the London Stock Exchange
• Up 45% since last month, could the Ocado share price continue rising?

James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

See author's posts