ii view: Ocado shares near record after switch to M&S

A clear pandemic winner, but is the share price now up with events?

Third-quarter update to 30 August

• Retail revenue up 52% to £587 million
• Average orders per week up 9.6% to 345,000

Guidance:

• Expects a full year adjusted profit (EBITDA) for Ocado Group of at least £40 million

Retail division chief executive Melanie Smith said:

"These are transformational times for Ocado Retail with M&S products now exclusively available online at Ocado.com. The successful switchover means that M&S products are available to buy in a weekly shop side by side with branded products for the first time. As a result, we can now offer customers more choice and better value than ever before, wider ranges than any traditional retailer, and thousands of products that are only available online through Ocado.com.

"Our aim is to continue to set the bar as we begin again to welcome new customers who are seeing the benefits of online shopping in ever greater numbers and we remain focused and on track to increase capacity by 40% through to 2021. Finally, I would like to thank my colleagues for their hard work and dedication in making this happen."

ii round-up:

Online supermarket and technology company Ocado (LSE:OCDO) today reported a 52% increase in quarterly retail revenues to the end of August as consumers continued to shop from home under the coronavirus pandemic. 

Ocado operates via the two divisions of retail and solutions. Retail is the company’s own online supermarket business, which until the end of August was partnered with Waitrose. 

Ocado shares rose by more than 5% in early UK trading and have nearly doubled in the year-to-date. Shares for more traditional supermarkets Tesco (LSE:TSCO), Sainsbury's (LSE:SBRY) and Morrison's (LSE:MRW) are all down over 10% during 2020.

As of September, the retail business has moved to become a 50:50 joint venture with Marks & Spencer (LSE:MKS). M&S products, along with Ocado's own branded items, can now be bought online and delivered by Ocado. M&S shares year-to-date have nearly halved. 

An initial range of 4,400 food products replaces 4,000 Waitrose products. 700 M&S home & lifestyle products are also available including toiletries, baby, kitchen and dining items. Since the switch, the average basket is up by around five items. Strong forward demand has been enjoyed including Ocado’s biggest ever forward order day at launch. 98% of customers are already shopping M&S.

Ocado’s solutions division is responsible for helping other retailers with their online offerings using its Ocado smart platform software and technology. Current retail partners include Morrisons in the UK, Kroger in the US and Coles in Australia. 

ii view:

Headquartered in Hatfield, Hertfordshire, Ocado was founded in 2000 and listed on the UK Stock Exchange in July 2010 at an IPO price of 180p per share. A current stock market value of over £18 billion is now comfortably more than Sainsbury's and Morrisons - worth around £4 billion each - combined. Only Tesco at just over £21 billion is yet to be rivalled on the UK stock market. 

Population lockdowns under Covid-19 have seen consumers flocking to home delivery options such as Ocado’s. First-half retail division revenues rose by 27%, and then by 52% in this latest quarter. And that’s before the switch from Waitrose to M&S – a move which looks to be creating its own tailwind. 

For investors, the outsourcing by rivals in using its services and technology through its solutions business is arguably most exciting. Fees invoiced to international solutions partners rose by 58% during the first half to the end of May. Ocado also opened partner customer fulfilment centres in both Paris and Toronto, and its technology and assistance to other retailers demands serious consideration when assessing prospects. That said, with the share price up more than 700% over the last three years, and the company in its last full financial year reporting a pre-tax loss, Ocado may need further big deals to keep up this kind of momentum.

Positives: 

• Growth for both Retail and Solutions continues to be reported
• Cash of £2.3 billion on the balance sheet at the end of May

Negatives:

• Price to net asset value of 16.3, above the three-year average of 8.3 times
• Doesn’t pay a dividend

The average rating of stock market analysts:

Hold