Ocado shares race toward 4-year low after new plunge

September's share price gains quickly disappeared following this trading update that showed people are shopping smaller baskets, while costs are rising.  

Retail remains the major driver of group revenues at Ocado Group (LSE:OCDO) through the joint venture with Marks & Spencer Group (LSE:MKS), although lighter baskets and heavier costs weighed on progress during its third quarter.

Lighter baskets have been offset by additional volumes in the 13 weeks to 28 August, resulting in overall sales growth which is 2.7% higher than the corresponding quarter last year, and 42% higher than the pre-pandemic comparative. This follows a weaker second quarter, and Ocado Retail is confident of stronger growth in the final quarter.

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However, even the anticipated strong end to the year is unlikely to move the dial for the year as a whole, with Retail now expected to show a small sales decline for the full year. Even though active customer numbers continue to grow, showing a yearly increase of 23% to 9460,00, there are other factors at play which serve to crimp financial progress. 

This will be amply evidenced in the final quarter, where cost headwinds are expected to weigh on profitability, especially energy and dry ice. By Ocado’s own estimates, these could add anything up to £45 million to the cost base combined.

In the meantime, Retail is making efforts to keep growth on an even keel. Average orders per week have risen by 10.7% and the average selling price by 5%, where food inflation costs of 7% were offset by 2% of customers trading down and looking for lower priced products. In response, Ocado has extended its range of own-label offerings, while also continuing to benefit from the 30% contribution from Marks & Spencer of the total of own-label products.

However, this has not been sufficient to offset a changing mindset from an increasingly cautious consumer. A combination of the search for value for money against an inflationary backdrop and an increasingly evident pressure on household budgets has resulted in average basket sizes declining by 6%, even though higher volumes have resulted in marginally higher overall revenues.

Even though it accounts for around 90% of total group revenues, today’s statement relates solely to the joint venture with Marks & Spencer and does not therefore provide an update on the Solutions business. The high-tech and unique offering driven by robotics and seamless delivery is one where strong growth has been long-anticipated but has yet to materialise meaningfully. 

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Even prior to this morning’s precipitous drop in share price following the Retail release, this has had the impact of confining Ocado to becoming a perennial “jam tomorrow” stock. Frustration has been in evidence as the pressure on Solutions to display some signs of sustained growth has led to a share price decline of 58% over the last year, as compared to a gain of 5.7% for the wider FTSE100.

As such, the jury remains out on prospects for the time being with the market consensus still stuck at a "hold", albeit a strong one.