Ocado Group plc (OCDO) Ordinary 2p

First-quarter revenue for Ocado Retail (the 50:50 joint venture with M&S) was up 10.6% to £645.3mn, as volumes grew 8.1%.

Average orders per week rose 8.4% to 414,000 and active customers grew 6.4% to 1.0mn. The average order value rose 2.1%.

Hannah Gibson, Ocado Retail's CEO, highlighted the progress of its Perfect Execution programme, going live with new M&S ranges and lowering the prices of 1,700 more products.

There was no change to full-year guidance, including mid-high single-digit revenue growth.

The shares rose 4.4% in early trading.

Our view

Ocado's retail business - the grocery delivery company half-owned by M&S - is continuing to perform well. Customer numbers have now passed the one million mark and volumes are showing impressive growth.

But there are things to monitor. Growth in retail sales has been achieved by selling more items rather than letting prices do the heavy lifting. We approve of the positive customer value perception this creates, but raising prices slower than UK grocery inflation will have an impact on profitability. Careful management on this front will be required to hit the group’s high mid-single-digit margin targets.

While Retail remains a focus, it’s important not to lose sight of Ocado's future growth engine, Solutions. Ocado Solutions charges third-party retailers to use Ocado's robotic systems. Hundreds of thousands of orders are processed each week, with the help of automated 'bots' scurrying around the trademarked grid systems.

There has been increasing demand for the kind of technology Ocado specialises in, allowing it to bring new partners on board. But the current economic outlook poses challenges, putting pressure on existing and potential partners to cut unnecessary spending. However, running operations through Customer Fulfilment Centres (CFCs) brings a host of cost savings and efficiency benefits which could offer a competitive advantage for those who can afford it. Ocado's product is market leading. The question is one of demand.

Ocado is stumping up hundreds of millions to fund CFCs. This has led to significant fundraising from shareholders. Medium-term plans for free cash flow generation from existing CFCs seem ambitious to us, and we can't rule out Ocado burning through its available liquidity faster than planned. Updates on progress against lower capital expenditure guidance for 2024 will be key.

On top of potential legal action with M&S over a withheld £190mn performance payment, there’s now a shareholder revolt over executive pay. We think the legal action is the bigger threat. With pre-defined targets not being met, it’s hard to see how Ocado will win this one. But when material amounts of money are at stake, you can bet management will do all they can to get some, or all of it paid. We’ll be following this closely, but regardless of the outcome, it’s hard to imagine it will benefit relations.

We should be clear - Ocado has an amazing product. It's the only global provider of an end-to-end, online grocery platform. That's an enviable position. As the group builds scale and partnerships mature, profits and free cash should flow. We just aren't convinced this will happen in the projected timeframe, which could result in knocks to the valuation.

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