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Ocado - revenue falls amid a challenging retail environment

Half year revenue fell 4% to £1.3bn, as strong growth in International Solutions and UK Solutions and Logistics couldn't offset declines in...

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Half year revenue fell 4% to £1.3bn, as strong growth in International Solutions and UK Solutions and Logistics couldn't offset declines in Ocado Retail.

Increased investment in building out customer fulfilment centres and higher costs from labour, utility and fuel, contributed to a loss before tax which increased from £27.9m to £211.3m.

The group remains on track to deliver full year guidance and isn't expecting to need further financing in the medium term.

The shares fell 1.8% following the announcement.

View the latest Ocado share price and how to deal

Our view

Ocado Retail - 50% owned by M&S - is the business behind the delivery vans you'll see on roads nationwide. Market share gains and increasing customers are both good signs. But that's not enough to overcome the unwinding of lockdown benefits and consumers who are tightening their belts.

More concerning are the ever-increasing cost pressures. Ramping up output is expensive, especially when you add in the impacts from higher utility and staff costs. In theory, these are short term problems. But there's a very real risk consumer spending stays lower for longer which would make covering the increasing fixed costs a struggle.

But growth for Ocado hinges on a very different story.

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. It's a very different environment now though, the weakening economic outlook comes as somewhat of a double-edged sword. On the one hand it puts pressure on existing and potential partners to cut unnecessary spend. On the other, running operations through Customer Fulfilment Centres (CFCs) brings a host of cost savings and efficiency benefits which could offer a unique competitive advantage for those who can afford to take the plunge.

We're pleased to see new partners coming through and the pipeline looks promising. Though turning intent into contracts has proved tricky in the past.

Servicing expansion plans comes at a cost, with Ocado stumping up hundreds of millions to fund CFCs - a far cry from the capital-light, tech business investors had once expected. The group's tapped investors for a touch shy of £600m earlier in the year and liquidity looks solid enough to support the hefty capital expenditure bill that's going to be needed over the next few years.

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. As the group builds scale and partnerships mature, profits and free cash should flow.

Thin profits make Ocado hard to value, but on a share price to sales basis it's clear the expansion costs and execution risks are being heavily priced in. The group now trades a decent way below its longer-term valuation. We share the cautious sentiment given the uncertain market but see a pathway taking shape to create long term growth.

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.

Half Year Results

Ocado Retail, jointly owned with M&S, saw revenue fall 8.3% to £1.1bn. That was driven by a 13% drop in customer basket value, as the cost-of-living crisis compounded the ongoing normalization of shopping behaviours. Active customers grew 11.6% and Ocado's share of the online grocery market increased from 10.8% to 12.1%. Higher operating costs contributed to cash profit (EBITDA) falling from £104.1m to £31.3m.

UK Solutions and Logistics saw revenue increase £38.3m to £395.6m, with fee revenue 8.9% higher to £79.7m. Average orders per week increased 6.5% to 491,000, by the end of the year the group expects to have capacity for 800,000. Cash profit decreased £1.5m to £28.6m, largely due the continued rollout of the Ocado Smart Platform and significant cost inflation.

Six new Customer Fulfilment Centres (CFCs) went live in International Solutions, helping revenue more than double to £58.5m. The division signed one new partner over the period and expects a 'strong pipeline of further CFC commitments' from existing partners. Cash losses were 1.1% higher at £57.2m, as the group continues to invest in expansion.

There was a free cash outflow, including lease payments, of £405.2m. Net cash at the end of the period stood at £758.8m following the £578.2m share issue in June.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 21st July 2022