Ocado Group plc (OCDO) Ordinary 2p
HL comment (16 January 2024)
Ocado's fourth quarter retail revenue rose 10.9% to £609.4mn. Growth was helped by an overall increase in volumes, as active customers and average orders per week rose around 6% each. Average selling prices also grew, but at a slower rate of 5.4%. However, customers were buying less per-shop on average, with average basket size based on number of items falling 1.6%. Revenue growth and cost reductions meant Ocado returned to being cash profit (EBITDA) positive for the full year.
The group had a record Christmas but warned that revenue growth will be held back by lower average selling prices this year. Overall, Ocado expects revenue growth to be in the mid to high single digits.
The shares rose 5.5% following the announcement.
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. We were especially relieved to hear that Christmas was a success, we'd been concerned a higher proportion of customers would have flocked to cheaper alternatives.
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. We'd like a better steer on the depth of incoming price cuts and what this will mean for margins, especially if volumes aren't sustained.
While things in this department remain uncertain given the highly competitive nature of supermarkets, 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
Forward price/sales ratio (next 12 months): 1.67
Ten year average forward price/sales ratio: 2.86
Prospective dividend yield (next 12 months): 0.0%
Ten year average prospective dividend yield: 0.0%
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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