Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Ocado - full year guidance unchanged

Ocado's half year revenue rose 8.6% to £1.4bn, reflecting growth in all business areas.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Ocado's half year revenue rose 8.6% to £1.4bn, reflecting growth in all business areas. The group generated cash profit (EBITDA) of £16.6m, compared to a £13.6m loss at the same time last year.

Ocado Retail saw revenue rise 5% to £1.2bn, where higher prices offset a reduction in the number of items bought on average. There was also a "modest" increase in active customers. The division generated a £2.5m loss, although margins improved in the second quarter. The group's third-party logistics business recorded revenue of £335.2m, up 1.7%. Cash profits were broadly flat at £14.6m, reflecting higher costs. Technology solutions revenue rose 58.9% to £198.2, reflecting a higher number of active customer fulfilment sites.

Ocado's free cash outflow of £300m widened, partly reflecting the timing of some payments and changes to seasonal stock levels.

The group's maintained its full year guidance, including "marginally positive" EBITDA from Ocado Retail and total group capital expenditure of £550m. Capital expenditure in the first half was £283.6m, with the majority being spent on the construction of new customer fulfilment centres and investment in the Ocado Smart Platform product.

The shares rose 7.5% following the announcement.

View the latest Ocado share price and how to deal

Our view

As far as the market's concerned, Ocado delivered a stellar set of half year results. Looking under the hood, it's clear progress is being made.

The retail business - half owned by M&S - is doing what it can in difficult circumstances, and performance has picked up. While the group's doing what it can, grocery inflation is rife, and customers are tightening their belts. Ocado isn't a discount name, making it tough to compete in the current environment. The group's still just about able to attract new customers, but people are buying less on average and the group's undertaking price cuts.

While things in this department remain challenging, it's important not to lose sight of the more important area of the business where the investment case is concerned.

Ocado's future growth is in fact focused away from Retail. It's all about 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 weakening economic outlook poses challenges. It puts pressure on existing and potential partners to cut unnecessary spend, and we're starting to see the online boom slow. 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. While Ocado says it believes it won't need further external funding - we aren't convinced that's the case. 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.

Credit where it's due, the fact full year capital expenditure plans remain intact is a relief and signals a better handle of the purse strings. But at some point, investors will want something other than a cash flow statement that's being read like a hawk.

There's also been on-again-off-again talk of potential takeover offers. This is purely speculation, but can't be fully ruled out.

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.

Ocado key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 18th July 2023