ii view: Ocado – retailer or automation play?

Shares for this FTSE 100 company are down by more than 40% over the last year. We take a look at prospects. 

First-quarter retail division trading update to 27 February

• Average basket size down 15% to £124
• Active customer numbers up 31% to 835,000

Chief executive of Ocado Retail Melanie Smith said:

"The last quarter has been encouraging for Ocado Retail despite the clearly evident challenges the industry and consumers are facing. Long term, we are confident that the trajectory of growth remains positive."

ii round-up:

Ocado (LSE:OCDO) operates via the two divisions of Retail and Solutions. 

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer (LSE:MKS). 

Solutions is responsible for helping other retailers with their online offerings, both in the UK and overseas, using its Ocado Smart Platform (OSP) software and robot technology.

For a round-up of this latest update, please click here. 

ii view:

Ocado Retail delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own brand products and a growing non-food selection. Current retail partners for its solutions business include Morrison’s in the UK, Kroger in the US, Groupe Casino in Europe and Coles in Australia. 

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

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For investors, ongoing investment spending at its Solutions business continues to offer a headwind, as do rising costs more generally, such as petrol and electricity, across both its Retail and Solutions businesses. Rival retailers like Tesco (LSE:TSCO) in the UK and others overseas are also sharpening their own delivery operations. Tough comparatives from the pandemic are still washing through and Ocado, unlike more traditional supermarket operators, does not currently pay a dividend.  

On the upside, active customer numbers at the UK retail business continue to grow, as does the delivery capacity of its UK operations. New business wins at the Solutions division are being signed, while costs across the company remain a management focus. In all, and while both investment and day-to-day cost headwinds cannot be overlooked, higher risk investors are likely to remain patient. 

Positives: 

• Efficient technology-based packing of customer orders
• UK capacity continuing to grow

Negatives:

• Business costs generally are rising
• Doesn’t pay a dividend

The average rating of stock market analysts:

Strong hold