- Weak fourth-quarter growth
- Sticks with profit guidance
It’s official. Sales have fallen for the first time at Ocado Retail, the joint venture between Ocado (OCDO) and Marks & Spencer (MKS). This outcome was previously trailed, but the confirmation of a 3.8 per cent revenue drop for the 2022 financial year sent Ocado’s shares down by over 6 per cent in early trading. An annual 12 per cent drop in basket volumes and “an unwind of pandemic shopping behaviours” hit performance as shoppers bought less due to cost of living pressures. But profit guidance was maintained – management expects “close to break-even” cash profits for the year.
While the group pointed to a post-period boost from Christmas trading, performance in its fourth quarter to 27 November lagged competitors. Retail revenue growth of just 0.3 per cent, which took sales to £549mn, compares very poorly to the quarterly growth rates revealed at supermarket peers Tesco (TSCO) and J Sainsbury (SBRY) in recent updates.
Weakness in consumer spending was evident in a drop in average basket value. This fell by over 1 per cent against the previous year to £117 in the fourth quarter, with the impact of a 7.6 per cent rise in prices offset by an 8.3 per cent decline in items per basket. This will impact margins. Shoppers are simply cutting back on the number of goods they buy as they keep an eye on their wallets, and with Ocado sitting at the premium end of the UK grocer range it looks exposed.
But while shoppers are buying less, Ocado did manage to increase its active customer base. This was up by 12.9 per cent to 940,000 at the year-end against the 2021 level, although total customer numbers were only “stable”. Another positive was delivered by market share performance, with Ocado growing its share from 11.7 per cent to 12.3 per cent year on year, according to data from Nielsen.
The group forecasts mid-single-digits sales growth and positive cash profits for 2023, with performance weighted to the second half of the year. It thinks that in the medium term, sales and cash profit margins will “recover strongly” despite headwinds.
We remain unconvinced. As RBC Capital Markets analysts warned, there is “downside risk to consensus estimates for both Ocado Retail and the group for next year and beyond. Ocado’s inability to scale rapidly means that the group’s profitability is being impacted by significant capacity investments at the same time as the consumer outlook and top-line growth are softening.” Sell.
Last IC View: Sell, 784p, 21 Jul 2022
