Ocado Group: Profit Surge Masks Persistent Risks in M&S Partnership

The Ocado Group's recent financial turnaround, marked by a 76.5% surge in adjusted EBITDA and a £612 million statutory pretax profit, has sparked investor optimism. However, beneath the headline numbers lies a complex interplay of accounting adjustments, operational challenges, and unresolved disputes with its critical partner, Marks & Spencer (M&S). As investors assess Ocado's valuation, the sustainability of its profit gains and the risks tied to its joint venture dynamics demand rigorous scrutiny.

The Accounting Boost: A One-Time Gain or Sustainable Growth?

Ocado's recent results owe much to a £783 million accounting gain tied to the deconsolidation of its M&S joint venture, Ocado Retail. This adjustment, driven by M&S assuming full reporting control, provided a non-operational boost to earnings. While the move aligns with strategic efforts to focus on its high-margin technology division—responsible for robotic warehouses and e-commerce solutions—the core question remains: Can Ocado sustain profitability without such one-off benefits?

The technology division itself is a bright spot. It generated £73 million in adjusted EBITDA, exceeding analyst expectations, with contracts from international partners like Lotte in Korea and Panda in Saudi Arabia. Yet, the group's overall cash flow remains fragile. Despite cost-cutting measures—including 500 job reductions—Ocado still posted a £108 million cash outflow in the first half of 2025. Its target to achieve cash flow positivity by 2025/26 hinges on operational improvements and resolving the M&S dispute.

The M&S Dispute: A Sword of Damocles

The partnership with M&S is Ocado's largest single risk. The unresolved £190 million final payment from M&S, contingent on performance targets set in their 2019 agreement, has turned into a bitter standoff. M&S argues that targets—linked to order volumes and customer retention—were unmet, while Ocado claims pandemic-driven disruptions justify adjustments. The dispute has dragged on for over two years, with Ocado calling M&S's proposed £28 million repayment figure “ludicrously low” and threatening litigation.

The stakes are high. If Ocado fails to secure a settlement, it could face further cash flow strains, especially as it relies on external financing to fund new customer fulfillment centers (CFCs). Meanwhile, M&S's refusal to pay risks undermining Ocado Retail's credibility as a growth engine. Despite recent sales growth in M&S products (up 15% in Q4 2023/24), the joint venture's losses remain a drag. M&S's share of the adjusted loss rose to £37 million in 2023/24, and while sales are improving, profitability remains elusive.

Structural Challenges and Strategic Shifts

Ocado's strategy to pivot toward its technology division is commendable but faces headwinds. Key partners like Kroger in the U.S. have delayed robotic warehouse rollouts, and the group's expansion into Spain with Bon Preu is still nascent. Internally, cost discipline is critical: The 500 job cuts and focus on “cash flow positivity” are positive steps, but execution must be flawless.

The company's plan to offload its retail division to M&S—thereby simplifying its structure—could be a game-changer. Such a move would free up capital and reduce operational complexity, but it would require M&S to agree to terms that address the payment dispute. Alternatively, a U.S. listing or strategic partnership could provide fresh capital, though regulatory hurdles and market skepticism about Ocado's execution capacity loom large.

Investment Considerations: Proceed with Caution

For investors, Ocado presents a high-risk, high-reward proposition. On one hand, its technology division has global potential, and its recent results show progress in cost management. On the other, the M&S dispute, delayed CFC rollouts, and persistent cash flow issues create significant uncertainty.

• Near-term risks: The unresolved £190 million payment dispute and potential litigation could pressure Ocado's valuation.
• Long-term opportunities: A successful pivot to technology, paired with CFC rollouts in growth markets, could redefine the company's trajectory.
• Valuation check: At current levels, Ocado's shares trade at a steep discount to pre-pandemic highs, reflecting investor skepticism. A resolution of the M&S dispute and tangible progress on cash flow could unlock upside.

Final Take

Ocado's profit surge is a mix of operational progress and accounting artistry. While its technology division offers genuine growth potential, the M&S partnership remains a liability until the payment dispute is resolved. Investors should demand clarity on two fronts: a settlement with M&S and a clear path to sustained cash flow positivity. Until then, Ocado's story is one of promise overshadowed by persistent risks—best suited for those with a high risk tolerance and a long-term horizon.

Investment advice: Consider a cautious approach, with a small position contingent on a positive resolution of the M&S dispute. Monitor cash flow metrics closely and avoid overvaluation traps until operational stability is proven.