Ocado – Retail Sales Down And Guidance Dropped, As Costs And Weakening Demand Weigh

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Ocado Group PLC (LON:OCDO) (the joint venture with Marks & Spencer) saw sales decline 5.7% in the quarter, to £564.7m. This reflected strong sales in 2021, boosted by the pandemic. Sales for the wider UK grocery market were 4% lower. Average orders per week grew 11.6% to 367,500, but that was more than offset by a 15% drop in the average basket size (£124) as customer behaviours shifted back toward pre-covid levels.

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The Bicester customer fulfilment centre (CFC) is set to open this year, adding capacity for 30,000 orders per week in the second half. Sites in Purfleet and Andover are up to around half their maximum capacities, now operating at a combined 65,000 orders per week. A new Zoom facility (same day delivery) is set to open in Canning Town this Spring, with further sites in the pipeline over the next 12 months.

The group saw a “significant” increase in a range of costs from raw materials to energy, passing these onto customers in the form of higher prices where possible. Additional headwinds of falling demand and shifting behaviours mean full-year revenue growth is expected lower than the previously guided mid-teens, at around 10%. Underlying cash profit (EBITDA) margins will also come under pressure.

The shares fell 7.4% following the announcement.

Ocado Group's Earnings

Matt Britzman, Equity Analyst at Hargreaves Lansdown:

“Falling retail sales from Ocado Group’s joint venture with Marks & Spencer aren’t necessarily a surprise. Last year’s comparative period saw online grocery shopping boom as lockdowns rippled across the country. Now we’re out of that, consumer behaviours are shifting back to more normal levels. Stocking up on big grocery orders hasn’t been as sticky as Ocado might have liked - resulting in a 15% drop in average basket size.

What’s more concerning is the drop in revenue guidance and a warning that margins are going to come under additional pressure. Falling overall demand in the UK grocery market and a consumer base that’s getting back in the groove of eating out aren’t novel headwinds, but with the added pressure of significant increases in costs, pretty much across the board, sales growth guidance has been dropped by around 5 percentage points.

It’s not all doom and gloom, new fulfilment centres are progressing which’ll add extra order capacity for the group. There’s also further progress being made on same day delivery capacity which should be a real positive if the group can deliver well on that proposition. But there’s no getting away from the fact the near term looks challenging, and the market reaction today is a consequence of that.”

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