13 September 2022
If you are covering Ocado Retail’s Q3 results, please see the following comment from Chris Beckett, head of equity research at Quilter Cheviot:
"Ocado Retail, the UK joint venture with M&S reported a disappointing Q3 update this morning. The business is the epitome of everything you wouldn't want in the present market environment - an unprofitable growth company, burning cash with delayed revenue from sales and operating in a subsector that is normalising from exceptional pandemic demand. However, beyond this Ocado is a world leader in food retail automation with an enviable list of blue-chip partners around the world.
"But it also has some real short to medium term worries resulting from the cost-of-living crisis. The business is suffering from increased energy costs (electricity +300%, fuel +15%) and dry ice costs which combined represent a £35-45m headwind. Guidance for full year EBITDA was consequently lowered to look for break-even (was £50m profit).
"UK Retail sales grew 2.7% in Q3 missing market expectations. The business benefited from extra capacity from the Bicester warehouse enabling an 11% increase in fulfilled orders and a 23% improvement in active customers. However reduced basket size (-6%) and some trading down (-2%) led to the sales miss despite 7% price inflation. Management now expects a modest sales decline for the full year implying a mid-single digit improvement in Q4.
"Ocado's' best in class technology enables superior profitability economics when scaled. The company makes large capital investments before charging for available capacity for many subsequent years - this is a disadvantage in an uncertain investment environment, but it should give Ocado higher returns than the outright sale of its technology. The stock therefore could be undervalued but lacks immediate catalysts for a rerating.
"These results will be important to investor sentiment and short-term profitability for the group but ultimately will be dwarfed in importance by the international solutions operations as Ocado Retail represents only 10% of the group valuation."
