Interactive Investor

Ocado update fails to excite but bank shares improve

28th March 2023 08:40

by Richard Hunter from interactive investor

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While Ocado struggles to shrug off its reputation as a 'jam tomorrow' stock, there are signs of tentative recovery elsewhere, reports our head of markets. 

Ocado

    Ocado Group (LSE:OCDO)'s brief update on the joint venture with Marks & Spencer Group (LSE:MKS) is something of a curate’s egg.

    The Retail arm of the Ocado business, which provides the lion’s share of revenues for the group, showed growth of 3.4% and an increase of 3.6% in average orders per week. Active customers also increased year-on-year by 13.8% to 951,000, although the growth is more pedestrian at just over 1% when compared to the numbers reported at the fourth quarter update, when the number stood at 940,000.

    At the same time, any number of pressures are being brought to bear amid a tightening trading environment. Ocado does not immediately register as a discount name and, in the current environment where a cost of living crisis is seeing many search solely for value, there has been an impact.

    In addition, food inflation is currently running at around 18%, while energy costs and labour shortages remain something of a drag on the sector. While it is evident that customers are still coming to Ocado, it tends to be more selective. Average basket values are largely flat and the average basket size has fallen by 7.5%, partly driven by the so-called “Covid unwind” as shopping habits continue to normalise.

    Yet with guidance unchanged and the outlook for earnings remaining “marginally positive”, there is little to excite investors in terms of any further measured progress for the Retail part of the business. In addition, it is the Solutions business (which is not directly included in this update) which has tended to provide the vast majority of share price volatility.

    The share price performance has reflected patience wearing thin with the group as a whole, where the Solutions arm has yet to live up to its billing. The shares have fallen by 58% over the last year, as compared to a flat performance for the wider FTSE100, and over the last two years a decline of 79% suggests that the group’s reputation as something of a “jam tomorrow” stock may have become entrenched. 

    The market consensus of the shares as a 'hold' also implies that the jury remains out on when and whether the group will ultimately fulfil its potential, although today’s positive initial share price reaction to the statement perhaps introduces a sliver of hope.

    Meanwhile, some semblance of calm may be returning to wider markets following the unwelcome recent shocks provided by stresses in parts of the banking sector.

    In the US, there has been much scurrying around, with interested parties looking to quell any further spikes in volatility. Both the Federal Reserve and the Treasury have had an impact in shoring up liquidity as well as potentially providing an emergency lending programme. Meanwhile, further comfort has been drawn by the actions within the banking sector, with the likes of Silicon Valley Bank and indeed Credit Suisse Group AG (SIX:CSGN) now arguably in safer hands.

    It may be premature to call an end to what could have turned into a crisis given both the fragility of sentiment and, over the coming days, the possibility of any further unwelcome surprises. Even so, time heals all wounds and in the absence of any new negative news, a return to business as usual is possible. That being said, thoughts of a possible recession have not gone away as central banks continue to grapple with the persistence of inflation by hiking rates, even though the end of the cycle may be globally near.

    In the meantime, bank shares like Lloyds Banking Group (LSE:LLOY) and Barclays (LSE:BARC) are seeing some support in early trade in the UK, although there remains much damage to repair. The index as a whole has also fallen from recent highs, not least of which was breaching the 8,000 barrier, although at current levels is showing a gain of 0.9% in the year to date.

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