Ocado shares slump 10% after retail update

Shareholders riding the Ocado roller coaster just took a sudden lurch lower following this update from its retail business. Our head of markets explains what's going on.

Ocado Group (LSE:OCDO)'s joint venture with Marks & Spencer Group (LSE:MKS) to which today's statement relates is showing signs of measured but bumpy progress.

The Retail arm of the Ocado business may provide the lion’s share of revenues for the group, but the Solutions business (which is not directly included in this update) certainly provides the vast majority of share price volatility.

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Indeed, the past year has seen a quite extraordinary roller-coaster ride for Ocado shares. A sharp spike following the announcement in November of a partnership deal with Lotte Shopping of South Korea was partly responsible for a share price which has risen by 77% over the last three months.

Even so, this rally was not enough to repair the earlier damage, and the shares remain down by 44% over the last year, as compared to an increase of 3.3% for the wider FTSE100. Further evidence that the shares do not do anything by halves is the opening reaction to this latest statement, with a fall of as much as 10% adding to the swing.

In terms of revenues, the group is currently largely reliant on the Retail side, where a 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, inflationary costs, investments in further capacity and higher marketing costs have all weighed on performance.

Revenues climbed by just 0.3% in the quarter, although average orders per week grew by 1.9%. Active customers also grew by 12.9% year on year to 940,000, although tellingly this also represents a marginal drop from the 946,000 reported at the third-quarter update. However, the average basket size declined by 1.3% in the 13 weeks to 27 November - prices rose (although Ocado points out that the amount of cost inflation passed on to the customer was the lowest among its competitors) but the number of items bought declined.

For the full year, a revenue decline of 3.8% still leaves the guidance unchanged that the business should break even on an earnings basis. more positively, revenues have increased by around 40% as compared to pre-pandemic levels, although an “unwind of pandemic shopping behaviours”, allied to the cost-conscious consumer, have conspired to lower basket volumes.

The group is more upbeat on a new fiscal year which has begun positively, with record festive sales reporting an uplift of 15% in the week leading up to Christmas. Longer term, the business is also positive on prospects, underpinned by customer acquisition activity and improvements to underlying productivity given the cutting-edge technology which the Solutions business provides.

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The group has yet to turn a sustained profit, and the competitive pressure on the Retail business is unlikely to abate. Meanwhile, frustration has long been in evidence for the Solutions part of the group to make a meaningful contribution, even if a steady direction of travel is at last being established with further partnerships.

In the meantime, the stock may have become the perennial “jam tomorrow” play and the volatility of the share price shows widely differing reactions to prospects. On balance, the market consensus of the shares as a 'hold' is reflective that for the moment, the jury remains out.