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Ocado - retail sales up 39.7% in first quarter

Sophie Lund-Yates, Equity Analyst | 18 March 2021 | A A A
Ocado - retail sales up 39.7% in first quarter

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Ocado Group plc Ordinary 2p

Sell: 1,797.00 | Buy: 1,799.00 | Change 4.50 (0.25%)
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Ocado retail (the joint venture with Marks & Spencer) saw sales rise 39.7% to £599.0m in the first quarter. Average orders per week were up 2.5% at 329,000. The average order size was £147, reflecting strong Christmas trading and increased ordering because of new lockdowns.

A mini customer fulfilment centre (CFC) opened in Bristol. A new CFC at Purfleet, and the re-opening of Andover later this year is expected to boost capacity by 40%. There's been a "very encouraging customer response" to the first international partners to go live - Sobeys and Groupe Casino.

Retail revenue and cash profits (EBITDA) are expected to grow at a slower rate from here. That's because we're lapping the introduction of the first lockdowns, and the stockpiling that came with it.

The shares fell 1.4% following the announcement.

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Our View

Ocado's Retail business, now 50% owned by M&S, is leading the online grocery revolution. Sales are booming thanks to lockdown demand, and the long-term shift to online shopping's here to stay. While growth rates will start to temper as we lap the first lockdown, we still think this market has huge growth potential.

But the business case for Ocado PLC hinges on a very different story to the delivery vans you'll see on roads nationwide.

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.

The pandemic has turbo charged the shift to online shopping, increasing demand for the kind of technology Ocado specialises in. That should make it easier for Ocado to unearth potential partners and strike more deals. But it's not a home-run just yet.

Expansion comes at a cost, with Ocado stumping up hundreds of millions to fund Customer Fulfilment Centres (CFCs) - a far cry from the capital-light tech business investors had once expected. The group's massively upped its planned capital expenditure, in order to strike while the iron's hot and develop as many CFCs in international markets as possible. Ocado thinks its portion of the addressable market is a whopping £2.8tn.

But the rate of investment, and profitability, is a disappointment. Solutions burns through cash at a heady rate. And the centres are long term investments, so it takes years to know if they will pay off. Recently added to the shopping list is two robotics companies. These should boost Ocado's already impressive automated systems, but a bit like the CFCs themselves, we don't know yet if the expensive additions will be worth the price tag.

Several hundred million in cash means we don't have any near-term funding concerns. But it's important the expected wave of new deals comes to fruition. If things don't go to plan, we can't rule out Ocado asking investors to open their wallets again.

We should be clear we think Ocado has a pretty amazing product. It's the only global provider of an end-to-end, online grocery platform. That's an enviable position in today's climate. As the group builds scale and partnerships mature, profits and free cash should flow.

But if new Solutions deals don't come fast enough, that plan gets thrown. Thin profits make Ocado hard to value, but on a share price to sales basis, the market's excited. This is a mark of confidence, but could limit upside potential - and means there's a lot resting on everything going smoothly from here.

Ocado key facts

  • Price/Sales ratio: 5.6
  • 10 year average Price/Sales ratio: 2.4
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. 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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Full year results (9 February 2021)

Ocado group revenue rose 32.7% to £2.3bn. That mostly reflects a 35.3% rise in Retail (the joint venture between Marks & Spencer and Ocado) revenue, and a 13.6% increase in the UK Solutions & Logistics business.

Group EBITDA rose 68.8% to £73.1m, which was broadly in line with expectations. However, this was driven by Retail, and the Solutions business was less profitable than analysts had predicted.

The group said it expects to spend £700m on capital expenditure in 2021, relating to the development of Customer Fulfilment Centres. This was some way above the market's expectations.

Ocado Retail was boosted by increased demand because of ongoing lockdowns. There was a £31 increase in average basket size, to £137 too. Revenue of £2.2bn was just over 35% higher than last year, with the increase supported by increased capacity. Some marketing activity was paused, which meant the number of active customers fell to 680,000, from 795,000. Despite higher costs, including Covid-19 related expenses, cash profits (EBITDA) more than doubled to £148.5m.

A 10.6% increase in fee revenue meant UK Solutions & Logistics revenue rose 13.6% to £654.3m overall. Increased distribution and administrative costs - the latter mostly relating to increased headcount and technology spending - meant cash profits fell to £44.4m from £72.1m. Profits were also held back by reduced fee income from Morrisons, after the agreement to take back capacity following the Andover fire.

International Solutions saw a 52.2% increase in fees invoiced, reaching £123.9m. Revenue for the division rose sharply to £16.6m, but this was helped by the sale of some equipment to a retail partner. This sale doesn't affect cash profits, so together with a 67.7% rise in distribution and administrative costs, meant cash losses widened to £83.3m, from £54.9m. The higher costs relate to the development of international Customer Fulfilment Centres, including headcount, technology and research development.

Ocado spent £190.6m on developing international Customer Fulfilment Centres, almost tripling from last year. Over half of this spend relates to North America.

The Other segment saw EBITDA losses widen to £36.5m, from £14.2m.

Ocado has received insurance payments of £103.9m relating to the Andover fire. The group is negotiating further claims and expects more payments relating to reconstruction and business interruption losses.

The group said it's mitigated most of the potential supply chain risks relating to Brexit - but is unable to do so for a number of fresh goods.

Despite the higher profits, there was a £119.2m free cash outflow in the year, reflecting higher capital expenditure - most of which relates to new CFCs. Net cash, including lease obligations, was £671.6m as at the end of November 2020.

For 2021 Ocado expects: double digit percentage revenue growth in UK Solutions & Logistics, and invoiced fees for International Solutions fees to rise 30%. Guidance wasn't given for Retail, given uncertainty surrounding Covid-19.

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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 Refinitiv. 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.