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Ocado - retail growth in line with guidance

Nicholas Hyett | 12 December 2019 | A A A
Ocado - retail growth in line with guidance

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Ocado Group plc Ordinary 2p

Sell: 2,171.00 | Buy: 2,175.00 | Change 89.00 (4.23%)
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Ocado's retail joint venture with M&S saw fourth quarter sales climb 10.8% to £429.1m, in line with previous guidance. That was driven by an increase in total orders, with order size broadly stable.

The shares were broadly flat following the announcement.

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Our View

Ocado's future is a lot more, well, futuristic, than simply delivering groceries. Having sold 50% of its UK Retail business to M&S earlier this year, its eggs are all in the Solutions basket.

The Solutions business charges retailers to use its robotic systems. Hundreds of thousands of orders are processed each week, with the help of Ocado's automated 'bots' scurrying around the trademarked grid systems.

The group isn't holding back on investment. The number of technology employees has risen 73% since 2015, and extra hands on deck mean over 100 new patent applications were filed last year. Booming e-commerce and the increasing threat from Amazon's groceries business means traditional supermarkets are increasingly looking for a digital answer. Given that background the spending makes sense - it's important to stay ahead of the curve. But it does also mean investors can't expect to see meaningful profits or dividends for a while yet.

There is a lingering bugbear. Ocado is having to stump up hundreds of millions to fund a lot of the Customer Fulfilment Centres itself - which is a far cry from the capital-light techy business model investors had once expected. These are also long term investments. So while landing the deals is key, it'll be years before we know if they'll pay off, and in order to keep momentum going, Ocado needs to hatch a fair few more.

For now Ocado remains heavily loss making and that makes it harder to value than a more traditional company. Looking on a purely sales basis, the shares change hands for 4.2 times expected sales. That's more than double the longer term average of 1.9. If it's to justify that rating Ocado needs to a) make sure existing partnerships are ultimately profitable ones, and b) get more contacts signed. There's still a lot to deliver.

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Fourth quarter trading statement

Average orders per week grew 10.4% to 350,000, with a stable average size of £104.90 per order.

The group's integration with M&S continues and it has identified substitutes for most of the 4,000 items previously supplied by Waitrose. The group's range now consists of over 55,000 items, and there are plans to add more M&S products to the range.

The Erith CFC delivered 70,000 orders per week during the period, at improved levels of efficiency.

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