Ocado shares sink 11% as Kroger reviews warehouse strategy

Ocado shares plunged 11% after its key US partner, Kroger, signaled a strategic review of its automated warehouse investments, potentially favoring existing stores for e-commerce fulfillment. This shift raises significant concerns for Ocado's international growth prospects, as the Kroger partnership is central to its Customer Fulfilment Centre (CFC) deployment strategy in the US. While Ocado reported revenue growth and targets cash flow breakeven next year despite ongoing losses, Kroger's cautious tone weighs on investor sentiment, although some analysts, like JPMorgan, remain bullish, citing Ocado's ability to pursue other global partnerships following the waived exclusivity.

Analysis

Ocado's valuation is under significant pressure following an 11% share price decline, directly triggered by its key US partner Kroger signaling a strategic review of its automated warehouse strategy. Comments from Kroger's interim CEO suggesting a greater reliance on in-store fulfillment for e-commerce cast doubt on the future pace of Customer Fulfilment Centre (CFC) rollouts, a cornerstone of Ocado's 2018 landmark deal and its international growth narrative. This development overshadows the company's solid top-line performance, which saw total revenue grow to £3.16 billion and technology solutions revenue rise 15%. Despite this growth and a stated target of achieving positive cash flow next year, Ocado remains loss-making, reporting a pre-tax loss of £375 million in the last financial year. Analyst sentiment is divided; Barclays has become more cautious, citing the risk to CFC investments, while JPMorgan remains 'overweight', arguing that the waiver of Kroger's exclusivity opens opportunities for Ocado to partner with other retailers globally. Technical indicators reflect the uncertainty, with the stock in a clear downtrend but also forming a potential 'falling wedge' reversal pattern, highlighting the high-stakes nature of the forthcoming results from Kroger's review.

Key Decisions for Investors

• Investors should closely monitor the outcome of Kroger's site-by-site CFC review, expected later this quarter, as a decision to scale back will materially impact Ocado's medium-term growth projections.
• Given the company's persistent losses despite revenue growth, its valuation hinges on the now-threatened growth story; reassess exposure based on the likelihood of Ocado achieving its cash flow positive guidance for next year.
• Consider the dual-edged sword of the waived Kroger exclusivity, which introduces immediate contract risk but also creates a potential long-term upside catalyst if Ocado can secure new partnerships in the US or other regions.
• For technically-oriented investors, the price action suggests caution, but the 'falling wedge' pattern indicates potential for a rebound, making support near 250p and resistance at 395p key levels to watch for entry or exit signals.