Ocado warns of bigger 2018 loss on investment, bonuses

By James Davey

LONDON (Reuters) - British online supermarket Ocado warned its pretax loss this year would likely be larger than market expectations due to a step up in investment and management bonuses.

Shares in the company have rocketed around 250 percent over the last year thanks to four major technology partnership deals, putting managers in line for hefty stock price-related payouts.

However, the shares fell as much as 7.5 percent on Tuesday, as Ocado reported a first-half pretax loss and flagged a larger one than currently expected by analysts for the full year due in part to investment in its distribution centres and technology.

Prior to the warning, analysts' average forecast was for Ocado to make a 2018 pretax loss of 16.1 million pounds ($21.3 million), versus a loss of 500,000 pounds in 2017.

Founded by three former Goldman Sachs bankers in 2000, Ocado has divided analysts like few other stocks. Some view its home deliveries from giant hi-tech distribution centres as the future of grocery shopping, while others see it as a costly and complicated venture that will never make sustained profits.

Its technology deals have put a fire under the shares in the past year, propelling the company into Britain's FTSE-100 blue-chip index. But analysts are similarly divided over whether they are the start of a steady stream of such partnerships or not.

"We believe the shares are fundamentally fairly valued on the basis of one international deal being signed per year over the next 10 years," said RBC Europe analyst Sherri Malek, who has a "sector perform" rating on the stock.

Chief Financial Officer Duncan Tatton-Brown told reporters Ocado was investing "to create future value".

He added the full-year charge related to management incentive plans was likely to be 9 million pounds, of which 4 million pounds was struck in the first half.

Ocado reported a pretax loss of 9 million pounds for its first half to June 3, on revenue up 12.1 percent to 800 million pounds. Core earnings fell 13.9 percent to 38.9 million pounds.

Both profit measures reflected a step-up in investment, largely additional costs at Ocado's robotic fulfillment facility in Andover, southern England.

Ocado warned in February investment in its UK distribution centres and software platform would put a brake on earnings this year. It said capital expenditure would be 210 million pounds in 2018, up from 160 million pounds in 2017.

The group kept its forecast for 2018 retail revenue growth of 10-15 percent and expects retail earnings trends to improve significantly over the second half, partly due to lower engineering costs per order and as new capacity at Andover, and at its newest distribution hub at Erith, near London, is used.

Chief Executive Tim Steiner predicted more technology deals.

"The market opportunity is huge, as is our ambition," he said.

Ocado struck its biggest deal so far, with U.S. supermarket chain Kroger, in May. That followed deals with Sweden's ICA Group, Canada's Sobeys and France's Casino.

The deals have driven up Ocado's market capitalisation to 6.81 billion pounds at Monday's closing prices - more than Morrisons, Britain's No. 4 supermarket group by sales.

($1 = 0.7547 pounds)

(Editing by Kate Holton and Mark Potter)