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Ocado - retail trading shows some positive signs

Ocado Retail (the 50:50 joint venture with M&S) revenue was up 7.2%...

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Ocado Retail (the 50:50 joint venture with M&S) revenue was up 7.2% to £569.6m, as prices rose 8.4%. Volumes returned to positive territory in final month of the quarter but were down overall for the quarter.

Average orders per week rose 1.9% to 381,000 and active customers grew 1.5% to 316,000. The average order value rose 4.2% to just under £121.

Hannah Gibson, Ocado Retail's CEO, highlighted that hundreds of new M&S ranges are going live in Autumn, and that price cuts would go further.

There was no change to full year guidance, including mid-single-digit revenue growth.

Ocado shares rose 4.9% following the announcement.

View the latest Ocado share price and how to deal

Our view

Ocado retail - which is half owned by M&S - has had a reasonable third quarter.

There's still evidence that customers aren't exactly flinging cash at the retailer, but signs are tentatively improving. Progress will need to be monitored closely as we head into the final quarter and festive trading ramps up. As a non-discount name, Ocado may find itself in the firing line if consumer confidence wanes. We'd like a better steer on the depth of incoming price cuts and what this will mean for margins, especially if volumes don't resurrect themselves.

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.

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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: 19th September 2023