Wheel comes off Webvan 2.0

No wonder analysts have been slashing forecasts. Monday’s trading update from the internet grocer — or Waitrose distribution arm as it is also known — reveals there has been no improvement in sales in the last quarter.

For the 12 weeks to August 7, sales growth was 16.9 per cent, the same as the preceding 12 week period and lower than the year-to-date run rate of 19.5 per cent.

Once again capacity constraints at its Customer Fulfilment Centre just outside London are blamed for the lack of quarter-on-quarter sales improvement, although analysts aren’t totally convinced by that explanation.

Here’s arch-critic Clive Black of Shore Capital:

To be fair to Ocado, the business has recently flagged up to the market that disruption at its Customer Fulfilment Centre (CFC) at Hatfield would impact sales; albeit no such indication of potential disruption was mentioned at the time of flotation – maybe management could just not see that far ahead at that stage. More perplexing though is the fact that if Ocado’s capacity is so tight and service levels are being so protected, why did I receive an offer of 25 per cent (yep, 25 per cent) for deliveries on Saturday 17th and Sunday the 18th and another for today. Such discounting suggests to us lots of capacity at a key time – something doesn’t add up to our minds at least.

Nope, it doesn’t add up.

Nor does this:

High customer service differentiates Ocado from its competitors. During the third quarter, we invested in our customer service to ensure it returned towards previous high levels. As a result of this investment, service levels have improved since the first half and in period 10, items delivered as ordered were at 99.0 per cent and deliveries on time or early were at 95.5 per cent. This investment is likely to lead to a slightly lower than expected increase in full year margins.

Why did customer service levels decline and what was the cost? More questions than answers.

One thing is becoming increasing clear, says Mr Black — Ocado’s business model looks fundamentally flawed and the company should focus on making its first fulfilment centre work before spending hundreds of millions on the next one, especially with competition intensifying.

Following this update we are minded to maintain our Ocado EBITDA forecasts for 2010/11F (a November year-end) at £36.7m. For now, we’ll keep our 2011/12F EBITDA forecast of £46.5m – which has fallen materially since flotation (consensus was £86m at flotation). To quibble about a low millions of pounds of EBITDA is to miss the point on the Ocado investment case to our minds though. This business makes a modest cash profit and an unattractive return on sales of c£600+m. We struggle to see the Hatfield facility ever making an attractive return and we question whether the additional fixed cost of CFC2 will contribute anything to returns either; far from it, they will probably go the other way for a considerable period of time at least. Such a business model should carry a low stock multiple to our minds, not an elevated one.

What’s also clear is the banks who brought Ocado to the market should hang their heads in shame. The company just hasn’t lived up to the hype or come anywhere close.

As noted above the consensus at float was for EBITDA in £86m for 2011/12. Black reckons the outcome is likely to £46.5m. Not exactly the fast growing opportunity it was billed as, eh?

At pixel Ocado was the biggest faller in the FTSE 250, down 16p at 117.7p.

Related link:
Ocado fails to deliver for investors – The Guardian
Webvan 2.0 delivers more downgrades – FT Alphaville