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Ocado - first quarter trading in line, but big increase in demand

Sophie Lund-Yates, Equity Analyst | 19 March 2020 | A A A
Ocado - first quarter trading in line, but big increase in demand

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Ocado Group plc Ordinary 2p

Sell: 2,101.00 | Buy: 2,105.00 | Change -1.00 (-0.05%)
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Retail revenue grew 10.3% to £441.2m in the first quarter, which was in line with guidance. There was no real impact from COVID-19 in the period, but there has been a significant increase in trading in the start of the second quarter.

The group has temporarily stopped new registrations online, closed its app and online shop to allow it to fulfil existing orders.

The shares fell 2.8% following the announcement.

View the latest Ocado share price and how to deal

Our View

Panic buying in the wake of COVID-19 has dominated headlines about Ocado, but that's not what investors should focus on.

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

Solutions charges 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.

We think that's an attractive proposition. Booming e-commerce and the increasing threat from Amazon's groceries business means traditional supermarkets are increasingly looking for ways to compete. Ocado's smart platform technology offers the digital answers they're looking for.

However, all that technology doesn't come cheap. Ocado is having to stump up hundreds of millions to fund a lot of the Customer Fulfilment Centres itself - a far cry from the capital-light tech business 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.

Coronavirus has the potential to disrupt plans too. If the pandemic causes a prolonged period of economic uncertainty, some retail chains could be less willing to spend heavily on expansion, which would be painful for Ocado.

On the other hand we could see a longer-term shift in consumer habits as millions of us stay at home and become accustomed to online shopping. If global retailers then decide to boost their own online offerings in response, this would be a serious tailwind. As of yet, it's too soon to say how this is going to play out.

The group now has over 1,700 members of staff dedicated to technology, which is no mean feat. On many levels, 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.

To its credit the group does have a net cash position of over £140m, and analysts expect it to grow in the coming years. But there are no guarantees - if the group were to face a severe downturn that pile would be eroded relatively fast.

That isn't helped by the fact Ocado remains heavily loss making. And that also makes it harder to value than a more traditional company. Looking on a purely sales basis, the shares change hands for 5 times expected sales. That's more than double the longer term average of 2. 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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First quarter and COVID-19 trading details

The 10.3% increase in revenue reflects a 10.2% increase in the average number of orders placed each week to 343,000, as well as a 0.3% rise in average order size to £110.24.

The group said guidance of 10-15% revenue growth for the full year is unchanged. It believes the increased sales seen recently will simply have been pulled-forward, and should even out in due course. It added there may be further disruptions ahead.

Ocado is on track for M&S goods to be available on the website from September.

Ocado Zoom - which offers customers delivery in one hour - continues to perform well, and plans for a new site are progressing.

In response to the changes in demand the group said "we will continue to monitor trends in demand closely, working with suppliers to increase stock in relevant categories, where possible, and adjusting our marketing approach, where necessary, to address these shifts in behaviours".

Find out more about Ocado shares including how to invest

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