ii view: costs hurt Ocado as shares keep falling

This retail/robot automation play is the worst performer in the FTSE 100 in 2022. We assess prospects. 

Third-quarter retail division trading update to 28 August

• Sales up 2.7% to £532 million from Q3 2021
• Average basket size down 6% to £116
• Active customer numbers up 23% to 946,000
• Average orders per week up 10.7% to 374,000

Guidance:

• Expects mid-single digit fourth-quarter sales growth
• Expects a small decline in full year sales, down from low single digit growth
• Expects close to break-even full-year divisional adjusted profit (EBITDA)

Chairman of Retail Tim Steiner said:

"We remain focussed on providing Ocado Retail customers with the best possible value to help them navigate the cost of living crisis, and are encouraged by the positive underlying trends in the business which underline the value of Ocado's differentiated proposition to customers. 

“Our online grocery model, which creates efficiency through advanced technology, offers customers a combination of competitive prices, the widest ranges, and industry-leading service. As consumer spending stabilises, we expect Ocado Retail will again deliver attractive and accelerating growth in sales and a strong recovery in profitability.

“For all these reasons, we are optimistic for the future even while recognising the challenges that higher energy bills and other inflationary pressures are creating for our customers today."

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ii round-up:

Ocado Group (LSE:OCDO) operates via the two divisions of Retail and Solutions. 

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer Group (LSE:MKS). 

Solutions is responsible for helping other retailers with their online offerings, both in the UK and overseas, using its Ocado Smart Platform (OSP) software and robot technology. Its own UK Retail division is a OSP user. 

For a round-up of this latest update on 13 September, please click here. 

ii view:

Ocado Retail delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own brand products and a selection of non-food items. M&S own-label accounts for just under a third of the average customer basket. Every shopping bag is packed in one of seven distribution centres using its own software and technology. Current retail partners for its solutions business include Morrison’s in the UK, Kroger in the US, Groupe Casino in Europe and Coles in Australia. 

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Analysts broadly break the Ocado business and its prospects into three areas; UK Retail, the valuation of contracts around its Solutions business, and expectations on newly won Solutions contracts. 

For investors, a cost-of-living crisis could see customers trade down to cheaper product alternatives where possible, and buy fewer items. Rising costs such as those for petrol, electricity and dry ice are forecast to reduce future profit, while other retailers like Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY) are also sharpening their own delivery operations and, unlike Ocado, they currently pay a dividend. 

More favourably, active customer numbers at the UK retail business continue to grow, with the Ocado’s own-label entry level priced range being expanded and its customer service levels rating highly. A new Retail division chief executive has been hired, its UK delivery capacity can add over 200,000 orders per week to meet expected future demand, while the solution division continues to work hard in attempting to win new supermarket customers. 

While the broad move towards online shopping continues, customers of Ocado's Retail division face economic headwind which could also affect spending plans of potential customers of its Solutions business. With the shares in freefall, it's impossible to say where the price will settle. This is a high-risk stock right now.

Positives: 

• Efficient technology-based packing of customer orders
• UK capacity continuing to grow

Negatives:

• Rising costs
• Doesn’t pay a dividend

The average rating of stock market analysts:

Strong hold