ii view: Ocado retail sales are growing but is tech more important?

First-quarter retail trading update to 3 March

• Revenue up 10.6% to £645 million
• Average orders per week up 8.4% year-over-year to 414,000
• Active customers up 6.4% to 1.02 million

Hannah Gibson head of Ocado Retail said:

‘We have made a strong start to the year, building on the momentum we established in 2023 through the progress of our Perfect Execution programme.

“We are delivering improvements in our proposition for customers, across unbeatable choice, unrivalled service and reassuringly good value. During the first quarter, we stepped up our efforts: enriching our product range with the strong growth of core M&S grocery lines and the debut of Makers Market, using our unique model to showcase incredible small brands; further enhancing slot and product availability; and lowering the price of 1,700 more products in our latest Big Price Drop promotion alongside further expanding the Ocado Own Range.”

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ii round-up:

Ocado Group (LSE:OCDO) operates via the three divisions of Retail, Logistics and Technology Solutions.  

Retail is the company’s own online supermarket business, run as a 50:50 joint venture with Marks & Spencer Group (LSE:MKS). Ocado Logistics supports both Ocado Retail and Morrisons in the UK. 

Technology 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 business trading update announced on 26 March, please click here. 

ii view:

Started in 2000, Ocado today employs over 18,000 people across the UK and overseas. Its Retail business delivers products including big-name brands, a range of M&S and Ocado own brand products and a selection of non-food items to more than 80% of UK locations. Every shopping bag is packed in distribution centres using its own software and technology. The Technology Solutions business supplies Ocado Smart Platform (OSP), an end-to-end eCommerce, fulfilment, and logistics platform, to other retailers around the world including Kroger in the US, Casino in France, and Coles in Australia. 

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

For investors, recent management outlook guidance for Tech Solutions pointed to 11 new customer fulfilment centres (CFCs) going live over the next three years as opposed to City hopes of 12 or more. It also lost money again in 2023. Rivals of its UK Retail business are also busy enhancing their own online and delivery operations, while the lack of a dividend contrasts with forecast yields of over 4% at both Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY). 

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On the upside, customer numbers for Retail are growing, with the business the fastest growing UK grocer according to a recent survey from independent market researcher Kantar. Revenues rose across all three of Ocado’s businesses during 2023, a high focus on costs persists, cash and cash equivalents of £900 million were recently reported, while an estimated price-to-net asset value ratio of two times compares to a three-year average nearer to seven times, implying better value. 

In all, consumer demand for online shopping is here to stay, with Ocado’s technology using robots to pack bags more efficiently than instore staff and trolleys. That said, whether retailers globally are ready to spend the money on the required infrastructure just yet and whether they use Ocado’s tech or an alternative’s, is yet to be seen. As such, Ocado shares will likely remain volatile and speculative. 

Positives: 

• Efficient technology-based packing of customer orders
• Growing Technology Solutions revenues

Negatives:

• Loss making
• Not paying a dividend

The average rating of stock market analysts:

Strong hold