ii view: Ocado delivers 40% surge in sales

The company is a clear Covid-19 winner, but are its record-breaking shares now more than up with events?

Second-quarter trading to date

• Retail revenue up 40.4% to date
• Suspended guidance for retail division revenue
• £1.2 billion of cash held

Chief executive Tim Steiner said:

"We are facing quite a different challenge to many, as we scale up Ocado.com to play its part in feeding the nation, and as we help our clients launch and roll out their online businesses more rapidly against a backdrop of a likely long-term increase in demand for online.

"Ocado remains in a strong position and while we should be grateful that our current challenges are around growth, expansion and increased demand, we have great empathy for all who are facing different challenges at this time. In retail, we are working with our small suppliers to make sure we pay them earlier than normal and we will work closely with any who are struggling".

ii round-up:

Online grocer and automated warehouse operator Ocado (LSE:OCDO) today announced a 40% jump in second-quarter sales as consumers continued to shop from home during the Covid-19 lockdown. 

The Hertfordshire-headquartered company is now delivering significantly more groceries to households than ever before. First-quarter sales by comparison had risen a more modest 10.3%. Last year, Ocado’s retail business formed a 50:50 joint venture with Marks & Spencer (LSE:MKS), which is now in the middle of a switch over from Waitrose.

Ocado shares rose by more than 3% in early UK trading to another record high, and are up over 30% year-to-date. Shares of rivals Tesco (LSE:TSCO), Morrison's (LSE:MRW) and Sainsbury's (LSE:SBRY) are down 8%, 7% and 17% respectively. 

Operational changes to adapt to the pandemic include no longer taking back plastic bags from customers for recycling and delivering groceries only to the doorstep. Suspending the delivery of mineral water has allowed it to deliver to 6,000 additional households per week. Frontline staff are being rewarded with a 10% bonus. 

The number of items per basket looks to have passed its peak as more normal shopping behaviours have returned. But, given the degree of ongoing uncertainty, sales estimates are no longer being made for the current financial year. Management previously predicted growth of between 10% and 15%.  

Its Solutions division recently handed over its first overseas customer fulfilment centres to international partners Groupe Casino and Sobeys.

Today's update came ahead of its Annual General Meeting (AGM). First-half results are due mid-July. 

ii view:

Ocado was founded in 2000 and listed on the London Stock Exchange in July 2010 at an IPO price of 180p per share. It operates two divisions. Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with M&S. Solutions is responsible for corporate partnerships with online retailers using the Ocado Smart Platform software and technology.

A current stock market value of over £12 billion is now comfortably more than both Sainsbury's and Morrisons combined, so investors are already pricing in a lot of good news. However, it could be argued that other traditional supermarkets do not offer a direct comparison. 

Now, Covid-19 is boosting its retail division while the solutions business has been winning large contracts overseas. In 2019, it signed its eighth and ninth solutions customers - Coles in Australia and Aeon in Japan. Ocado technology and its assistance to other retailers now requires serious consideration when assessing prospects. However, the share price is up 65% since the end of February and by over 600% since the end of 2017, which may deter new money.

Positives: 

• Growth for both Retail and Solutions continues to be reported
• Cash of £1.2 billion on the balance sheet

Negatives:

• Price to net asset value of 11.6, above the three-year average of 8.3 times
• Does not pay a dividend

The average rating of stock market analysts:

Hold

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.