Active numbers up for Ocado - but for how long?

Ocado’s (OCDO) website highlights “a permanent redrawing of the grocery industry landscape” as one of the principal factors underpinning its investment case. Group chief executive, Tim Steiner, reiterated the point within the online grocer’s latest half-year figures, stating that “the landscape for grocery worldwide has changed, for good”. Do the figures back up the claim, or does it amount to little more than confirmation bias?

Logic dictates that a certain proportion of the increase in online traffic will hold fast even as a degree of normality returns. Indeed, even out of lockdown the number of digital grocery transactions is well in advance of pre-pandemic levels. But this could conceivably reflect lingering worries over infection rates, and logic also dictates that considerations over quality assurance and price competitiveness will increasingly inform consumer decisions, particularly with food prices on the rise. The change in shopping habits that Steiner refers to, though entrenched to a degree, may not be quite so profound as he imagines.

The group has been developing software, robotics, and automation systems for online retail for over 20 years, but it could be argued that it is still in a development phase, though this is probably scant consolation for shareholders who have been nursing losses since 2017.

Nevertheless, the scale of the business is changing, evidenced not only by the headline-grabbing 50:50 joint venture with Marks and Spencer (MKS) but also by a 45 per cent increase in capital expenditure (ex-joint ventures) to £319m, as the roll-out of customer fulfilment centres continues apace. Total technology expenditure came in at £122m, of which £71m was capitalised.

Ocado also believes that its investment case is bolstered by the “increasing opportunities to leverage [its] technologies”. This is borne out by a new agreement with Auchan Retail to develop Alcampo’s online business in Spain using the Ocado Smart Platform.

It would be churlish not to applaud the 22 per cent hike in active customers to 777,000 at the period-end, nor should we dismiss the 19.8 per cent rise in retail revenues to £1.2bn as a pure aberration. But we can’t be sure what will happen if householders shake off the domestic dining habit developed over the lockdowns, though it follows that any reduction in the average number of family meals taken at home would probably result in falling values for the average basket size. Consensus forecasts from FactSet point to an adjusted earnings loss of 27.16p for the November year-end, reducing to negative 23.1p in the following year. Despite years of innovation, Ocado remains a work in progress. Hold.

Last IC view: Hold, 2,080p, 24 Mar 2021