17th Mar 2022 15:29
(Alliance News) - Investors have gotten accustomed to online businesses reporting endless losses even as sales skyrocket, but Ocado Group PLC on Thursday reminded them that even sales can go in the other direction.
Ocado Retail Ltd, the online-only grocer's joint venture with high-street stalwart Marks & Spencer Group PLC, reported a challenging start to its new financial year with consumer behaviour reverting to pre-Covid trends and inflationary pressure persisting.
Ocado shares were down 9.5% at 1,089.30 pence on Thursday afternoon in London, the worst performer in the FTSE 100 index. The day's decline comes despite the stock already being sold-off post-pandemic. It now is down 48% in the past 12 months.
Shares in M&S were down 3.5% at 161.19p, but are up 1.9% over the past year.
By contrast, Deliveroo PLC was up 5.4%, despite on Thursday reporting a widened loss in 2021, even as revenue grew by 57%. The food delivery app also warned about rising costs but reassured investors by saying it sees a "path to profitability".
Ocado Retail said revenue in the 13 weeks to February 27 was GBP564.7 million. This was up 32% from 2020 but down 5.7% on the GBP599.1 million notched a year ago.
This was despite average orders per week growing 12% from 2021 to 367,500, as the average basket size dropped 15%. It reflected an easing of pandemic restrictions and a return to in-office working, Ocado said.
"The last quarter has been encouraging for Ocado Retail despite the clearly evident challenges the industry and consumers are facing...Of course, as we have seen since the end of Covid restrictions, the value of the average basket and shape of the week continue to normalise," said Ocado Retail Chief Executive Melanie Smith.
Ocado reported inflationary pressures in the quarter. The grocer said significant increases in raw materials and product cost prices, as well as in the prices for energy, utilities and dry ice, added further cost headwinds for the grocery industry.
"Ocado Retail has been working closely with suppliers where appropriate to actively manage this level of inflation. The business has moved certain retail prices, where costs could not be mitigated, in line with the rest of the market and will continue to monitor the market to ensure alignment on prices and delivery of fair value to customers," it said.
Looking ahead, Ocado said the scale of food price inflation, coupled with the overall level of market demand as the cost of living increases, is "difficult to predict".
"These uncertainties over inflation, which have increased significantly in recent weeks due to the war in Ukraine, the overall level of market demand, and the continued return to pre-Covid shopping patterns, mean that while easier comparatives, strong customer demand, and further growth in capacity, should see revenue growth end the year in the high-teens, the full-year growth rate may be closer to 10%," said Ocado.
Alongside its annual results last month, the firm said Ocado Retail revenue should return to "strong, mid-teens revenue growth" in 2022.
On margins, Ocado said it is carrying out a series of mitigating cost measures.
Commenting on the results, Shore Capital said the 32% rise in revenue from two years ago was a better gauge of the health of the Ocado business than the 5.7% decline from last year.
Shore analysts Clive Black and Darren Shirley did note that the overall online segment of the UK grocery market grew - to 12% to 13% of the total currently from 7.5% pre-pandemic - so Ocado Retail hasn't gained market share.
More positively, despite the 15% fall in average shopping basket size, Ocado Retails average basket size is "still very healthy and pretty much market leading in our view versus its supermarket rivals", they said, and the M&S product penetration within that is high at about 30%, "which is very good news for both parties in the joint venture".
The Shore analysts cautioned, however: "We do not have a recommendation [on Ocado shares] because Ocado Group is not really capable of being reasonably modelled from a financial perspective. Few if any forecasts to date have been achieved, with a track record of downgrade and deferral of financial targets a systematic feature of Ocado Group's market messaging."
By Lucy Heming; [email protected]; and Tom Waite; [email protected]
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