Ocado (LON:OCDO) stays on the right side of the retail divide
Ocado’s half-year core earnings have come in comfortably above forecast, and that should keep it on the right side of a wave of investor wariness on Britain’s retail industry due to rising inflation and stagnant wage growth. Ocado’s shares are among 13 out of the 50 odd retail stocks tracked by City Index to have risen by more than 10% so far this year, with 21 still in the red.
The stock has often had a speculative premium and shades of such thinking have again been evident recently, particularly following Amazon's (NASDAQ:AMZN) deal to purchase Whole Foods (NASDAQ:WFM). At least some of Ocado’s around 11% rise YTD though can be linked to its recent run of more than fair core earnings growth. And the 2.7% rise in EBITDA it reports this morning will back that, given that this keeps the group on track to meet consensus expectations for the year of least £97m, and perhaps the symbolic milestone of £100m.
Sufficient worries do remain however—which partly explains the stock’s indecisive reaction to its results on Wednesday morning. It may be that investors are beginning to look past a persistent decline of basket size—falling again, by 1.4% in H1—attributing it to market structural and competitive factors as larger grocers establish themselves online and newer upstarts encroach. Much of the concern will continue to be at least partly neutralised whilst active customers keep growing, as with the first half’s 12.7% rise to 600,000. With much up in the air for Ocado, ambiguous key metrics are less than ideal.
Investor divide sets in
It will be more difficult to balance the stock market’s curious division over Ocado. Its business seems to be one that investors either love or almost hate. That’s reflected in the group being the second most-shorted stock on the London Stock Exchange right now. And that’s in an environment which is generally cautious about all of Britain’s large retailers.
Again, investors’ patience with halting progress on profitability—down 9.4% over the half-year—may be limited to the extent to which Ocado eventually comes good on the glittering promises it has tantalised shareholders with over the years. Recent events may have brought the inflection point closer. CEO Tim Steiner describes Amazon’s deal to buy Whole Foods—Amazon’s most significant foray into in-store grocery retail yet— as “positive” for Ocado. It’s an admirably positive attitude. But Steiner has more convincing to do.
True, the pick-up of interest from US retailers is promising for potential further deals to license Ocado’s technology. But scepticism is partly based on the fact that Amazon’s intention to scale-up a dual channel strategy was widely known when Ocado first partnered with Morrisons (LON:MRW) in 2013. And the intent was certainly during the two and half year delay between Ocado’s announcement that it would sign a further technology deal, and the as yet ill-defined agreement with an unnamed European group last month.
The group says its mysterious new deal will be the “first of many”. Above-sector average progress on revenues and underlying earnings has probably bought Ocado more time with investors to demonstrate that claim. But it’s not immune to the retail industry’s challenges.
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