Interactive Investor

Ocado predicts record Christmas and celebrates US court win

14th December 2021 08:11

Richard Hunter from interactive investor

There's been a positive response to latest numbers from Ocado Retail, but growth has been affected by labour shortages and other setbacks. Our head of markets assesses latest news from the online supermarket.

Customer trends may be beginning to normalise, but customer growth at Ocado Retail, Ocado's (LSE:OCDO) joint venture with Marks & Spencer Group (LSE:MKS), remains strong as the company looks forward to its strongest ever Christmas.

Revenues in the 13 weeks to 28 November were impacted by strong comparatives, as well as the operational (and profit) disruption at its Erith Customer Fulfilment Centre (CFC). A decline of 3.9% from the corresponding period was recorded, although revenues were significantly ahead of pre-pandemic levels and up by 31.6% compared to 2019.

Meanwhile, average orders per week grew by 8.5% (and by 14% compared to 2019) and the number of active customers rose by 22% currently to stand at over 830 000, which is a notable achievement given the ferocity of competition in the retail environment.

Elsewhere, labour shortages and cost inflation are also in play and, from a wider perspective, the company continues to invest heavily in further CFCs to absorb more capacity. Two new CFCs were opened in the period and are already processing 60 000 orders per week, towards an ultimate target of 145 000, and contributing to an overall capacity of 700 000 orders per week. 

Further investment totalling £50 million is expected next year, which will be broadly split between new capacity, staff and marketing spend as Ocado Retail looks to consolidate strong customer growth further.

In the meantime, the normalising consumer trends as the company moved away from lockdown and partially headed back to the office – present restrictions aside – saw the average basket size decrease by 12% although, again, showing progress having risen by 13% compared to 2019.

The outlook for 2022 is also upbeat for Ocado Retail, with expected revenue growth towards the top end of the 10% to 15% already guided and with further “Zoom” stores (same day delivery) likely to be opened given the success of the pilot. Ocado expects five to be in operation next year, generating revenues of £20 million per annum.

In a separate announcement, there may also be some investor relief following the finding from the US International Trade Commission in Ocado’s favour at the expense of Norwegian robotics company Autostore, which has been an overhang for some time.

For all the reported progress, the market excitement towards Ocado is found in the Solutions business, where sales progress is not covered in this update. The Ocado Smart Platform is the state of the art system on which much of the company’s future growth is planned, and it is here where the fastest growth is likely to be recorded should the company be able to maintain its record of new third party partnerships both at home and abroad.

Given the perceived lack of growth as compared to high expectations, Ocado has struggled to shrug off its reputation as a “jam tomorrow” stock, with the shares having declined by 27% over the last year, as compared to a gain of 11% for the wider FTSE100 index. Over the last two years, however, the picture has been brighter as the shares remain ahead by 31%, with the warm initial reaction to this update providing some further solace. Even so, while the company remains in the phase between promise and delivery, the market is taking a wait and see approach, with the consensus of the shares still stuck at a "hold".

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