Ocado – Retail Revenue Burned By Erith Fire And £5M In Extra Labour Costs

Ocado – Retail Revenue Burned By Erith Fire And £5M In Extra Labour Costs
reverent / Pixabay

Ocado Group PLC (LON:OCDO) – which is 50% owned by Marks & Spencer – saw third quarter revenue fall 10.6% to £517.5m. Revenue fell 1.8% in the first 6 weeks. Following the fire at the Erith fulfilment centre in July, lost capacity and sales meant revenue fell 19% for the rest of the period.

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Ocado processed 338,000 orders a week, up 1.4% on last year. New capacity means the group can now process up to 600,000 orders a week, and announced plans to increase this to 700,000 in 2022-2023.

The total cost of the fire, not covered by insurance, is expected to be around £10m. Rising labour costs, particularly in LGV and delivery drivers, will cost up to £5m at the full year. The group said Ocado Retail “expects to deliver strong revenue growth in FY22”.

The shares fell 6.7% following the announcement.

Ocado's Erith Fire

“Some 300,000 orders were lost as a result of the Erith fire, despite Ocado’s best efforts to minimise disruption. This kind of operational problem is something the group can ill afford. As we head into the most important trading period of the retailer’s year, it’s crucial that all dents have been ironed out, so it can fully capitalise on the festive season.

Prior to the fire, sales were still subdued. That’s largely a result of the exceptional demand brought on by the pandemic this time last year. Equal partner M&S has invested a lot in this partnership, and it’s a key pillar of its turnaround plan – getting sales moving at pace again will be top of the to-do list. That’s a job made harder by the resumption of more ‘normal’ life. Ongoing concerns about new variants is likely to keep online demand buoyed to an extent, but the extreme tailwinds of last year are certainly no more.

Ocado is also facing rising labour costs, including having to incentivise to try and plug the gap left by the HGV driver shortages – failure to do so will impact sales performance. Ocado prides itself on being a more premium grocer, if it can’t get enough of the right stock on its virtual shelves, it could reduce revenue more so than for other supermarkets. The increased staff costs could cost up to £5m at the full year, which together with an uncertain trading outlook, means profits could suffer.”

Article by Sophie Lund-Yates, equity analyst at Hargreaves Lansdown

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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