ii view: Ocado optimistic as comparisons get easier

This online food shopping play are down by more than 50% over the last year. Buy, sell, or hold?

First-quarter retail division trading update to 26 February

• Revenue up 3.4% to £584 million from Q1 2022
• Average basket size down 7.5% to 45 items
• Active customer numbers up 13.8% to 951,000

Guidance:

• Continues to expect mid-single digit revenue growth with an improving trajectory during the year
• Continues to expect adjusted profit (EBITDA) to be negative in the first half and positive in the second half

Retail chief executive Hannah Gibson said:

 "We continue to attract more and more customers to Ocado, by investing in great value for customers including our new Ocado Price Promise and providing unbeatable choice and service. 

“While the trading environment remains challenging, we expect to build momentum through the second half of the year, as we improve our proposition, grow our customer base, and no longer lap Covid shopping behaviours. This solid 2023 performance will enable us to return to sales growth and profitability."

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 retail division update on 28 March, 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. Every shopping bag is packed in one of eleven 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: its UK Retail business; the valuation of contracts around its Solutions business; expectations about newly-won Solutions contracts. Both Lotte in South Korea and Auchan Polska in Poland are new customers in 2022, with partners now totalling 12. 

For investors, a cost-of-living crisis for consumers and tough pandemic related comparatives both offer a challenging backdrop, with the average number of items purchased per customer down in this latest period. Elevated business costs such as those for petrol, electricity, and dry ice offer headwinds, while other retailers like Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY) are also sharpening their own delivery operations, with their shares, unlike Ocado’s, currently paying shareholders a dividend. 

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On the upside, active customer numbers at the UK retail business continue to grow, with accompanying management outlook comments pointing towards accelerating growth over 2023. New customers for its solutions business were signed during 2022, additional distribution centres are being opened, cash liquidity as at the 2022 year-end of £1.3 billion continues to support investment plans, while an estimated price-to-net asset value ratio of 2.4 times compares to a three-year average nearer nine times, suggesting better value. 

The broad move towards online shopping should benefit Ocado, and an analyst consensus estimate of fair value at over £9 per share offer grounds for longer-term hope. But while there are indeed positives, Ocado shares remain volatile and somewhat speculative, with investors likely to remain sceptical at least until the business begins generating regular and sustainable profits. 

Positives: 

• Efficient technology-based packing of customer orders
• Growing number of solutions related customers

Negatives:

• Loss making
• Not paying a dividend

The average rating of stock market analysts:

Strong hold