Interactive Investor

Ocado revenues boom, but will online shopping shift stay?

18th March 2021 10:31

Richard Hunter from interactive investor

Loading

Share on

Delivery firm may find it harder to show the pleasant surprises it is now known for.

Ocado (LSE:OCDO)’s joint venture with Marks & Spencer (LSE:MKS) is forging ahead, given the twin boosts of the festive period and a possibly permanent shift to online shopping.

The Q1 statement relates just to the retail side of the business, and covers the three months to 28 February. This obviously includes Christmas trading, which was expected to show strong revenue growth.

This was indeed the case, with revenues rising by 40% to £599 million, comfortably ahead of expectations and with the number of average orders per week growing by 2.5% to 329,000.

Trading strength over the festive period also bolstered an average basket size which typically included 25% of M&S products, giving some justification to the costly joint venture which is Ocado Retail.

In terms of outlook, the company will now come up against tough comparatives as the full effects of lockdown in 2020 will be the yardstick.

Ocado is increasingly confident that the shift to online grocery shopping is permanent, with the pandemic providing a boost which rapidly brought forward what had been a slowly evolving trend.

It therefore plans to continue its expansion of both standard Customer Fulfilment Centres (CFCs) and also mini-CFCs, designed to serve a local audience.

For the latter, the company is currently looking at a minimum of 12 new micro sites with a London bias to serve the Ocado Zoom concept of deliveries within one hour of ordering.

Passing reference was also made to the real driver of the business and indeed the share price over recent times, in terms of the Solutions arm, and in particular international expansion.

The imminent opening of the first CFCs in support of the tie-up with US company Kroger (NYSE:KR), initially hailed as a transformational deal when agreed, will attract particular attention.

The trading update by definition avoids the concerns that these international deals need not only to repay Ocado’s capital-heavy investment but also must grow in number to fulfil the drain on long-term resources.

There is little doubt that this potential exists, given Ocado’s cutting-edge technology, but expectations are now running high to the extent that share price growth is showing some signs of cooling.

The shares have drifted 23% over the last six months, although the longer-term performance remains one of breath-taking growth. Despite the recent wobble, the shares are up by 53% over the last year, as compared to a gain of 33% for the wider FTSE 100, and over the last five years have added 600%.

The market consensus of the shares has for some time reflected the fact that the shares may be up with events, as new developments are awaited, and currently stands at a weak ‘hold’.

The company overall may be well-positioned to continue its successful trajectory, but Ocado’s pleasant ability to surprise will be increasingly difficult to deliver.

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