Ocado recovery rally continues despite laboured progress

Shares in the online supermarket were down 79% from their peak, but a speculative recovery means they've now lost just 3% in 2023. Our head of markets assesses half-year results.

Ocado Group (LSE:OCDO) continues to make somewhat laboured progress, with increasing revenues unable to prevent another loss for the period.

Depreciation and exceptional items were the main culprits in widening the pre-tax loss for the 26 weeks ended 28 May to £289 million from a previous £211 million, a deterioration of 37%. There were also mixed performances over the two quarters from the most recognisable parts of the business, namely the Technology Solutions business which houses the Ocado Smart Platform (OSP) and is seen as the engine of growth, and Retail which compromises the 50% joint venture with Marks & Spencer.

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For the Solutions business, the main development is that the unit became earnings positive for the period, after an inordinately long time of being in the doldrums, largely driven by a 59% increase in revenues. The business is now beginning to see the benefit of some of its overseas expansion, with the first Customer Fulfilment Centre (CFC) opened in Japan, and with a business efficiency drive with Kroger of the US which Ocado hopes will showcase its offering to future potential partners.

Earnings at Solutions increased by £65 million compared to the previous period, with growth of 35% in live modules. At the same time, operating costs were reduced and, leveraging the group’s OSP technology, Ocado is now seeking to expand growth outside of grocery through its Ocado Intelligent Automation service, where it is currently in talks with several potential partners. It remains to be seen whether this new venture will succeed, with long-suffering shareholders having been previously disappointed with the group’s pace of progress.

The Retail business returned to profitability in the second quarter and posted revenues which increased by 5% over the half-year, although earnings decreased by £30 million over the period. There were some positive signs within the business, such as an increase of 10.6% in active customers, taking the total to 959,000 and average orders per week rising by 4% to 392000. The rise in average basket value was largely achieved by passing on costs to the tune of 8.4% to customers, as opposed to any increase in basket size. The business is also continuing to invest, as is the case with so many retailers in this space, in price-matching competitors which itself comes at a cost.

More broadly, the financial position seems sturdy enough to withstand further investment, with access to liquidity of £1.3 billion. Ocado is maintaining its guidance for the full year, with a pipeline of new customers in Solutions combining with a focus on improving cashflow and reducing costs, potentially providing fresh tailwinds to the business.

With regards to future growth, it has long been the case that herein lies the rub. The scale and capability of the group’s cutting-edge robotic technology is rightly much admired, but has yet to deliver profitability on anything like a sustainable basis.

In the meantime, Ocado has become something of a perennial “jam tomorrow” stock, which investors have abandoned after patience wore thin. Since its peak in September 2020 at over £28, the shares have seen a decline of 79% and it will take some considerable effort for the group to reverse the entrenched cynicism of potential investors.

More recently, vague bid speculation surrounding the stock which has subsequently come to nothing has lifted the shares by 11% over the last three months. But this has done little to limit the ongoing trend, with the shares down by 23% over the last year, as compared to a rise of 2.5% for the wider FTSE100.

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The brief and limited rally in the price around the time of that speculation probably saved Ocado from what appeared to be certain relegation from the premier index at the June reshuffle, since when the movements have been more pedestrian.

The bounce in the shares at the market open today is another reprieve based on earnings which outpaced expectations and, while positive proponents of the stock remain, these are slowly dwindling as time goes on with progress generally continuing to underwhelm. As such, the market consensus remains stuck at a 'hold', albeit a strong one.