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Ocado – sales improve and losses narrow

Ocado’s progress continues as sales improve and losses narrow.
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Ocado’s reported full-year revenue rose 9.9% to £2.8bn. Reflecting growth in all business areas. The group generated underlying cash profit (EBITDA) of £51.6mn, compared to a £74.1mn loss over 2022.

Ocado Retail saw revenue rise 7% year-on-year to £2.4bn, where higher prices offset a reduction in the number of items bought.There was also an increase in active customers, growing by 5.9% over the year to 998k.

The group’s third-party logistics business recorded revenue of £667.5mn, up 0.7%. Technology Solutions revenue rose 44% to £420.5mn, reflecting the rollout of new capacity in both new and existing markets.

Free cash outflow improved to £454.2mn from £778.0mn.

In 2024, Ocado’s targeting mid to high single-digit revenue growth in Retail, high single-digit volume growth in Logistics and 15 to 20% growth for Technology Solutions.

The shares rose 4.8% in early trading.

Our view

Ocado's retail business - the grocery delivery company half owned by M&S - is doing better than we expected.

Customer numbers are within a whisker of one million and volumes are improving as a result. Mature customers, those who have shopped five times or more on were up 9% on the year. This is particularly promising as these shoppers are typically less likely to switch retailers.

For all the progress, there are things to monitor. As a non-discount name, Ocado may find itself in the firing line if consumer confidence wanes. Signs on this front continue to be positive. Although there have been more product price drops, stable volumes and improved operational efficiency have allowed the group to expand margins. Further progress on this front is expected, and the group’s high mid-single-digit margin targets look achievable in our eyes.

While the highly competitive nature of supermarkets brings an element of uncertainty, 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 current economic outlook poses challenges, putting pressure on existing and potential partners to cut unnecessary spending. 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 that full-year capital expenditure came in under guidance is good news and signals a better handle of the purse strings. Updates on how they progress against their lower capital expenditure guidance for 2024 will be read like a hawk.

There's also been talk of potential legal action with M&S over a withheld £190mn performance payment. With pre-defined targets not being met, it’s hard to see how Ocado will win this one. But when material amounts of money are at stake, you can bet management will do all they can to get some, or all of it paid. We’ll be following this closely as it develops.

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, based on previous day’s closing values. 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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 29th February 2024