Third quarter Retail sales of £532m were up 2.7% on last year and 42% higher than pre-pandemic levels. There was a 23% increase in active customers to 946,00 and a 10.7% rise in average orders per week.
However, the average basket value fell 6% to £116m. Customers have increasingly bought lower value offerings and bought less per-shop because of rising inflation. Ocado has increased its average selling prices by 5%, this includes a 7% increase in food prices, offset by a 2% reduction because of people opting for value-for-money items. Overall, the group expects to see a sales decline next quarter.
This, together with increasing costs, including a three-fold rise in electricity prices , and rises in the cost of dry ice (used to keep products cool) means Ocado is now expecting cash profits (EBITDA) to be close to break-even for the full year.
The shares fell 9.0% following the announcement.
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Our view
Ocado Retail - 50% owned by Mamp;S - 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 this trend has a disproportionally big impact.
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, which together with these rising costs means profits are going to be thin on the ground for as long as that's the case.
But future 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. The group tapped investors for a touch shy of £600m earlier in the year. While there are no immediate concerns, if the tough cost conditions persist, we can't rule out Ocado burning through its available liquidity faster than planned. Further capital raises could be seen.
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.
Thin profits make Ocado hard to value, but on a share price to sales basis, expansion costs and execution risks are being heavily priced in. The group now trades a little way below its longer-term valuation. We share the cautious sentiment given the uncertain market in the near to medium-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.
Half year results (21 July 2022)
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.
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.
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