Interactive Investor

ii view: Ocado sales hindered by fulfilment centre fire

14th September 2021 10:53

Keith Bowman from interactive investor

Loading

Share on

Shares are down 17% over the last year but up more than 500% over the last five years. Buy, sell or hold?

Third-quarter 13-week Retail trading update to 29 August

  • Retail revenue down 10.6% versus a gain of 54% in Q3 2020
  • Revenue down 1.8% over the first six weeks
  • Revenue down 19% in the remaining seven weeks (fire disruption)

Chief executive Tim Steiner said:

"Despite the challenges we faced in the period, I am delighted to report that Ocado Retail is performing well, improving the customer experience even further and continuing to grow the business in a post-lockdown environment.

“With a market leading customer offer and technology, we are confident Ocado Retail will continue to grow market share as we help them to roll out even more capacity and we look forward to Christmas and delivering strong growth in the new financial year, with our long-term outlook as compelling as ever".

ii round-up:

The joint Retail venture between Ocado (LSE:OCDO) and Marks & Spencer (LSE:MKS) today reported a 10.6% drop in sales as a fire at its south-east London Erith customer fulfilment centre (CFC) disrupted operations. 

Sales fell by 1.8% in the first six weeks of the period compared to the pandemic fuelled demand of last year, but dropped by 19% in the following seven weeks given the need to cancel some orders following the 16 July fire. 

Ocado shares fell by more than 5% in early trading although later recovered to trade down 2%.

Management flagged strong underlying trading, with sales for the quarter £142 million or 38% above that achieved in the pre-pandemic third quarter of 2019. A record number of 64,000 new customers were acquired in the period, taking total customers to 805,000. It also pointed to expected strong revenue growth over the full-year 2022, revealing plans to open a further CFC in Luton. 

Ocado estimated that the fire cost it £35 million in lost revenues and £10 million in lost operating profit. The net cost to Ocado not covered by insurance was placed at £10 million.

As with the broader industry, rising costs of labour, particularly for LGV and delivery drivers, has been seen. Additional costs of up to £5 million could potentially weigh on full-year results, reflecting additional measures being taken to hire new staff including raising hourly rates and offering signing-on bonuses.  

A fourth-quarter Retail trading update is scheduled for 9 December. 

ii view:

Ocado 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. It delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own brand products and a growing non-food selection. Solutions is responsible for helping other retailers with their online offerings using its Ocado Smart Platform (OSP) software and robot technology. Current retail partners include Morrison's (LSE:MRW) in the UK, Kroger in the US and Coles in Australia. 

Analysts now broadly break the Ocado business and its prospects into three arenas: its UK Retail business; the valuation of contracts around its Solutions business; and thirdly, expectations on newly won Solutions contracts. Ocado’s share price has fallen from a one year high of 2911p to under 1900p.   

For investors, expectations of a slowdown in sales for its UK retail business, as the population emerges from the pandemic, look to have been feeding into the recent de-rating. A fire and subsequent operational disruption is also clearly a hinderance. The company’s technology label given its software and robot technology are also likely to have been in play. Ocado’s ongoing litigation battle with Norwegian robotics company AutoStore also remains a concern. 

But Ocado once estimated the addressable market for its Solutions business to be around $700 billion, but pandemic impeded international travel is unlikely to be oiling the wheels of Solution business deals. Around 80% of Ocado’s stock market value is considered by analysts to be attempting to value its Solutions business, the other 20% the UK Retail business. In all, while 2021 may not witness the growth of 2020, an estimated analyst fair value price of £21.97 implies potential for a return to better times.

Positives: 

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

Negatives:

  • Legal claim over patents by Norwegian robotics company AutoStore
  • Doesn’t pay a dividend

The average rating of stock market analysts:

Hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up