ii view: Ocado beefs up forecasts for grocery business

Third-quarter Retail trading update to 1 September

• Revenue up 15.5% to £658 million
• Average orders per week up 14.7% year-over-year to 437,000
• Active customers up 10.3% to 1.06 million

Hannah Gibson head of Ocado Retail said:

"Our strategy remains focused on giving our customers unbeatable choice, unrivalled service and reassuringly good value. We're seeing the momentum of this, with more customers shopping with us more often, getting even better service at better value.

We're pleased with the progress we're making and excited about how much more there is to deliver."

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ii round-up:

Ocado Group (LSE:OCDO) today delivered sales at its UK Retail business which beat City hopes, with the online supermarket operator increasing its divisional revenue growth estimate for the full year. 

Third-quarter sales to late August climbed 15.5% from a year ago to £658 million, exceeding analyst hopes for nearer 10%. Ocado now expects full-year sales for the Retail division, run as a 50:50 joint venture with Marks & Spencer Group (LSE:MKS), to grow by low double digits, up from a previous estimate of mid-single digit growth. 

Shares in the FTSE 100 company rose 8% in UK trading having come into this latest announcement down by around a half year-to-date. Shares in rival Tesco (LSE:TSCO) are up just over a quarter during that time. The FTSE 100 index is up 8% in 2024.

Ocado operates across the three divisions of Retail, Logistics and Technology Solutions. Logistics supports the retail business, while Tech Solutions helps other retailers like The Kroger Co (NYSE:KR) in the US execute their online offering using Ocado Smart Platform (OSP) software and robot technology.

Ocado Retail retained its annual adjusted profit margin (EBITDA) forecast at 2.5%, excluding exceptional costs from its Hatfield operations.

Active customers at the M&S joint venture Retail business climbed 10.3% from a year ago to 1.06 million, helping drive average orders per week up 14.7% to 437,000. 

Product volumes during the quarter expanded 15.4% from a year ago, countering a 0.4% reduction in prices, as management continued to invest in pricing, leaving the average basket value almost unchanged at £120.97.  

A fourth-quarter Retail business update is likely mid-January, with overall group results possibly announced late February. 

ii view:

Started in 2000, Ocado today employs over 18,000 people across the UK and overseas. Its Retail business delivers products including big-name brands, a range of M&S and Ocado own brand products and a selection of non-food items to more than 80% of UK locations. Every shopping bag is packed in distribution centres using its own software and technology. Technology Solutions supplies the Ocado Smart Platform (OSP), an end-to-end eCommerce, fulfilment, and logistics platform, to other retailers and including Casino in France and Coles in Australia.  

Analysts broadly break the Ocado business and its prospects into three areas. First its UK Retail business; second the valuation of contracts around its Solutions business; and thirdly, expectations on newly won Solutions contracts. 

For investors, previously detailed progress at Tech Solutions has been slower than many analysts had hoped for. A reported loss in 2023, announced late February, added to prior annual losses. UK Retail rivals are busy enhancing their own online and delivery operations, while the lack of a dividend contrasts with forecast yields of over 3% at Tesco, Sainsbury (J) (LSE:SBRY), and M&S.  

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To the upside, Ocado's Retail business is the fastest growing UK grocer, according to a recent survey by independent market researcher Kantar. Revenues rose across all three of Ocado’s businesses during 2023. A high focus on costs persists, while an estimated price-to-net asset value of 1.9 times compares to a three-year average nearer seven times, suggesting better value now exists following a share price decline of 50% this year. 

On balance, consumer demand for online shopping is here to stay, with Ocado’s bag packing technology more efficient than instore staff and trolleys. That said, global retailers appear reluctant to spend money on the required infrastructure just yet, and whether they use Ocado’s tech or an alternative is still playing out. It means Ocado shares will likely remain volatile and speculative.  

Positives: 

• Efficient technology-based packing of customer orders
• Growing Technology Solutions revenues

Negatives:

• Loss making
• Not paying a dividend

The average rating of stock market analysts:

Strong hold