Ocado Retail (LON:OCDO) is the joint venture with Marks & Spencer, and the business has been able to ride the wave of some of the latter’s recent success by association.
A strong trading quarter culminated in record Christmas sales, with Ocado joining the ranks of the festive success stories. For the quarter as a whole, revenues increased by 10.9% compared to the previous year and comfortably above the 7.2% achieved in the third quarter. Overall volumes rose by 4.8%, average orders per week by 6.3% and the average basket value by 3.8%. There was also an increase of 5.9% in active customers to 998000, with the figure now having topped the million mark since the end of the trading period.
Ocado Retail has been able to pass on some cost inflation, although well below the UK’s headline number, such that average selling prices rose by 5.4%. The availability of own brand products, along with the “Ocado Price Promise” is at odds with the company’s reputation as being a higher end retailer, but the group nonetheless continues to invest in this value while also keeping a sharp eye on wider, controllable costs across the business.
Trading for the year as a whole also shows measured progress, if not to the levels of the final quarter. Revenues grew by 7%, average orders per week by 4% and basket value by 2.7%. Average selling prices saw growth of 7.9%, although a combination of an extremely cost-conscious consumer and the unwinding of pandemic behaviour weighed on overall volumes, which dipped by 0.9% for the year.
In terms of outlook, Ocado Retail remains committed to sustained volume growth and a medium-term target of margins in the high single mid-digits. Revenues are likely to be affected by lower selling prices, as the ferocity of food inflation continues to cool, while of course the industry in which it operates continues to exhibit the traditional levels of fierce competition, particularly at the pricing point.
Positive though this update may be, it excludes the contribution of the Solutions business which has been something of a millstone around the neck of the group as a whole. Progress in the high-tech delivery solution for other retailers has been laboured and certainly not at the pace which saw the share price race to a record high of over £28 in September 2020. The business has subsequently become seen as something of a “jam tomorrow” stock, with patience wearing thin following large swathes of investment which have yet to translate into sustainable and notable profit.
Vague but unsubstantiated takeover rumours from the likes of Amazon (NASDAQ:AMZN) have underpinned the most recent share price performance, which has risen by 17% over the last three months. However, this is not enough to repair earlier price damage, and the shares remain down by 19% over the last year, which compares with a drop of 3.4% for the wider FTSE100. Over the last three years, the shares have cratered by 76% and, while this may create some interest in terms of valuation opportunities, the Solutions business needs to live up to its billing before any thoughts of a recovery can be properly entertained.
In the meantime, the jury remains out on when and whether the group will ultimately fulfil its potential, although today’s positive initial share price reaction to the statement perhaps introduces a sliver of hope. For now, the market consensus of the shares remains rooted at a hold, albeit a strong one.
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