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Ocado - profits to dip as volumes fall

Ocado Retail, which is a joint venture with M&S, saw revenue rise 0.3% in the fourth quarter, to £549.4m.

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Ocado Retail, which is a joint venture with M&S, saw revenue rise 0.3% in the fourth quarter, to £549.4m. That was driven by a higher number of average orders per week and a 12.9% increase in active customers to 940,000. The group enjoyed a ''record'' Christmas.

However, the average basket value fell 1.3% to £117 in the quarter. That reflects a combination of people purchasing fewer items and opting for cheaper products, because of cost-of-living pressures.

Ocado highlighted that its overall price inflation was lower than other supermarkets, and it grew its share of online grocery to 12.3% from 11.7% last year.

In the new financial year Ocado will focus on its ''Perfect Execution'' programme, which includes investing in offering value for money, improving efficiency and product availability. The lower volumes mean cash profits are expected to be negative in the first half. Full year revenue percentage growth is expected to be in the mid-single digits. The group expects a recovery in 2024.

The shares fell 8.4% following the announcement.

View the latest Ocado share price and how to deal

Our view

The market was disheartened by Ocado Retail's latest figures. That side of the business is 50% owned by M&S and is a purely digital supermarket. But long-term growth rests on the Solutions business.

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 accelerated the shift to online shopping, increasing demand for the kind of technology Ocado specialises in. It's a very different environment now though, the weakening economic outlook poses challenges. It puts pressure on existing and potential partners to cut unnecessary spend. 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.

The recent partnership deal with Lotte, a large player in South Korea, showed markets that there are still businesses happy to take those benefits, despite a weakening economic outlook. That's promising.

But servicing expansion plans comes at a cost, with Ocado stumping up hundreds of millions to fund CFCs. The group tapped investors for a touch shy of £600m last year. There're no immediate concerns, but if tough cost conditions persist, we can't rule out Ocado burning through its available liquidity faster than planned.

Ocado Retail is the business behind the delivery vans you'll see on roads nationwide. The economic backdrop means customers are tightening their belts in a big way. Ocado is hardly a discount name, so it's been unable to increase its prices as much as competitors - there was a shorter lever to pull before risking losing customers.

More concerning are the ever-increasing cost pressures. Ramping up output is expensive, especially when you add in the skyrocketing impacts from higher utility and staff costs. We think the weaker sales outlook will persist for some time. Basket volumes aren't expected to recover until later in the new financial year, and cash profits are set to be "marginally positive" for the full year.

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.

For now, thin profits make Ocado hard to value but on a share price to sales basis, expansion costs and execution risks aren't as heavily priced in as they have been. We remain cautious given the uncertain market in the near-term.

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.

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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.

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Article history
Published: 17th January 2023