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Ocado - retail revenue rises by 52%

Sophie Lund-Yates, Equity Analyst | 15 September 2020 | A A A
Ocado - retail revenue rises by 52%

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Ocado Group plc Ordinary 2p

Sell: 1,962.00 | Buy: 1,963.50 | Change 27.00 (1.39%)
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Retail revenue rose 52% to £587.3m in the third quarter (which ended on 30 August 2020). The group also said the customer reaction to the switch over to Marks & Spencer products on 1 September has been positive.

The improved trading, and positive effect increased sales have on margins means Ocado expects full year cash profits (EBITDA) of "at least" £40m.

The shares rose 7.0% following the announcement.

View the latest Ocado share price and how to deal

Our View

Coronavirus has accelerated the shift to online shopping. This benefits Ocado, not least because increased retail sales means the group expects to leave loss-making territory this year.

That's because increased trading means margins are looking brighter. As more orders rattle through Ocado's expensive robotic warehouses, its infrastructure enjoys operational leverage as each extra sale doesn't cost a lot and can drop through to profit. But investors shouldn't be blindsided by this - profits are still going to be pretty thin on the ground.

And in reality the headline act is still the Solutions business.

After selling half the retail business to M&S, this department holds the key to future growth. It 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.

Coronavirus is likely to have created a permanent increase in demand for online groceries. In theory that means Ocado will be able to unearth a higher number of potential partners and strike more deals as grocers look to increase their online capacity. But it's not a home-run just yet.

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.

The Solutions division continues to burn through cash at a heady rate. That isn't likely to change for some time. In fact it's pretty hard to know when this will change, because the centres are long term investments. So while landing the deals is key, it'll be years before we know if they'll pay off.

In terms of liquidity we don't have any immediate concerns, with access to over £2bn in gross cash sitting on the balance sheet at the last count. We don't doubt that Ocado has a great product, and it's well placed to capture a shift to online shopping. But it's crucial the expected wave of new deals comes to fruition. If things don't go to plan it's going to be a while before Ocado can ask investors to open their wallets again.

It's important to take Ocado's valuation into account too. Its thin profits makes it harder to value than a more traditional company. Looking on a purely sales basis, the shares change hands for over three times more than the ten year average. That means if the Solutions business falters, so could the share price.

Ocado key facts

  • Price/Sales ratio: 7.2
  • 10 year average Price/Sales ratio: 2.2
  • Prospective yield: 0.0%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details

The improved retail revenue reflects increased demand for online groceries and the positive effect of last year's weaker Q3 sales. Order sizes are continuing to normalise following the peaks seen in lockdowns, but are still higher than pre-crisis levels.

The average number of orders per week rose 9.6% to 345,000 and the average order size was £141.

The Marks & Spencer launch increased the average number of items per basket by five, and the weighting of M&S products compared to Ocado items is higher than the preceding retail partner, Waitrose.

Ocado is on track to increase capacity by 40% through to 2021.

Find out more about Ocado shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown.. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.