- As the online grocery boom continues, the group is guiding to full year cash profits of at least £60m, up from previous expectations of at least £40m.
- It is also set to acquire two US robotics companies for $287m (£222m).
Ocado (OCDO) continues to be a big winner from the Covid-19-driven shift to online grocery shopping. As consumers migrate online “in record numbers”, the retail and technology group has bumped up its full-year profit expectations – it now forecasts that cash profits (Ebitda) for the year to 1 December will top £60m, up from previous guidance of “over £40m”. This would be around a two-fifths increase from 2019.
The improved outlook comes after a strong performance from Ocado Retail, its 50:50 joint venture with Marks and Spencer (MKS). Having dumped its long-term grocery partner Waitrose, the £1.5bn tie-up with M&S saw sales jump by more than 50 per cent in the third quarter to £587m. While no specific figures were given for the fourth quarter, sales are said to be “in line with the trends reported in the third quarter”. Broker Shore Capital estimates that they are up 40 per cent year on year.
Alongside the profit upgrade, Ocado also announced that it has struck agreements to purchase two US robotics companies for close to $300m (£232m). Adding to its warehouse technology capabilities, the move is designed to accelerate the commercial delivery of robotic picking solutions to its ‘Ocado smart platform’ clients. Subject to US regulatory approval, the group is set to fork out $262m for San Francisco-based Kindred Systems – which develops robots used in picking and packing online orders – and $25m for robotic arm designer Haddington Dynamic. Amid the structural shift to online shopping, chief executive Tim Steiner says that the acquisitions also represent an opportunity to expand into robotic solutions outside of grocery and into general merchandise.
The two deals are expected to add around £30m of revenue in 2021, but have a “small negative impact” on cash profits. While they are being funded by Ocado’s existing cash reserves and the issue of new shares, Shore Capital analyst Clive Black says that “at the current rate of cash burn, pencil in another fund raise down the line”.
Can the momentum continue?
Ocado’s shares have surged upwards during the pandemic and jumped by almost a tenth following this latest update. In the face of such momentum, the question is whether this is as good as it can get for the retail darling.
According to data consultancy Kantar, online grocery sales in the UK in the four weeks to 4 October were up more than three-quarters versus a year earlier, with one in five households now ordering their food via the internet. Ocado has captured a 1.8 per cent share of the UK grocery market, but it is facing a similar dilemma to video streaming giant Netflix (US:NFLX) – amid an increasingly competitive environment, if consumers don’t switch to Ocado’s services now, will they ever?
The group is struggling to provide enough delivery slots to meet demand, leaving an opening for the bigger supermarket players. Tesco (TSCO) has more than doubled its online delivery capacity to 1.5m slot per week, compared with an average of 345,000 orders per week for Ocado at the last count. Tesco’s growth has been aided by a new ‘urban fulfilment centre’ (UFC) that enables orders to be put together more quickly and it plans to develop at least 25 UFCs to support its online business. Meanwhile, as its digital sales soar, Sainsbury (SBRY) plans to boost its online grocery orders to 700,000 per week – including home delivery and click and collect – and extend its delivery times.
The introduction of a second lockdown across England means that Ocado’s pandemic tailwind will likely continue. There is also the prospect of a bumper Christmas period as restrictions on the hospitality industry could propel higher festive spending on food for home consumption – M&S’s more luxury food usually does well during the holiday season. But looking further ahead, this premium offering may prove a detriment during recessionary conditions and as price competition for regular food shopping ramps up. The burgeoning threat from Amazon's (US:AMZN) foray into groceries is also worth keeping an eye on, including its partnership with supermarket chain Morrisons (MRW) that is designed to draw consumers further into the Prime ecosystem. In that light, a forward price-to-sales ratio of 6.3 versus 0.3 and 0.2 for Tesco and Sainsbury, respectively, looks a little steep. Hold at 2,500p.
Last IC View: Hold, 2,613p, 1 Oct 2020
