ii view: Ocado and new partner M&S deliver growing sales

Ocado proves its resilience, but is a value equal to a combined Sainsbury's and Morrisons justified? 

Third-quarter trading update to 1st September 2019

• Retail revenue up 11.4% to £386.3 million
• Average orders per week up 12.1% to 314,000
• Average order size down 0.8% to £105.42

Retail chief executive Melanie Smith said:

"These first set of results from the joint venture between Ocado Group and M&S show the resilience of Ocado following the Andover fire and the momentum the business now has. As we continue to enhance our offering and add more capacity in the UK, our leading partnership will deliver the very best experience to an ever-growing number of customers.

"Bringing Ocado and M&S together on-line will give UK consumers even greater choice, value and service and will create important new opportunities for our colleagues, suppliers, and other stakeholders. These are really exciting times for Ocado as we prepare to launch the full M&S food range online for the first time ever, which customers will be able to buy alongside their other favourite products on Ocado.com from September 2020 at the latest."

ii round-up:

Online grocery retailer Ocado (LSE:OCDO) operates two divisions - Retail and Solutions. 

Retail is the company's own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer (LSE:MKS). Solutions is responsible for corporate partnerships with online retailers using the Ocado Smart Platform software and technology.

Retail delivers over 50,000 products, including big-name brands, a range of Ocado own brand products and a growing non-food selection to over 74% of the UK population. 

A pared down third-quarter trading update focused only on its newly established M&S joint venture, which proved broadly positive. Retail revenue grew 11.4%, up from 9.7% during the first half and in line with management's prior second-half guidance of between 10% to 15%. 

Average orders per week rose 12.1% to 314,000, aided by additional capacity at its fourth facility in Erith, although average order size retreated 0.8% to £105.42, reflecting a slightly higher frequency of customer purchases.

The share price edged up by just over 1% in mid-morning UK market trading. 

ii view:

The difficulty in accurately valuing a growing, but loss-making, online business such as Ocado continues to divide both analysts and investors. With a stock market value of £9.6 billion, equal to both Sainsbury's (LSE:SBRY) and Morrisons (LSE:MRW) combined, investors already appear to be pricing in a lot of good news. 

Arguably, other traditional supermarkets do not offer a direct comparison. Ocado has been winning large contracts with significant overseas retailers, and its technology tag clearly warrants serious consideration when attempting to paint a picture of future prospects. 

However, while this latest update does serve to demonstrate resilience in the face of the previous warehouse fire and ongoing sales momentum, investors are still undertaking something of a leap of faith here. As such, the shares remain an investment for higher risk investors happy to take a longer term view.

Positives: 

• Sales growth accelerated despite battling a previous warehouse fire
• M&S adds a strong and trusted brand
• Half-year fees from its solutions partners grew by 36% to £122.7 million

Negatives:

• Price to net asset value of 15.9, above the three-year average of 8.2 
• Doesn't pay a dividend
• Ongoing need for heavy investment

The average rating of stock market analysts:

Weak hold