13th Sep 2022 14:14
(Alliance News) - Shares in Ocado Group PLC took a hit on Tuesday, compounding a difficult year thus far for the online grocer, after a profit warning for its retail joint venture arm.
Ocado reported sales growth for Ocado Retail in its third quarter, but warned that shoppers are checking out with smaller baskets and seeking value-for-money items due to the cost-of-living crisis.
Shares in Ocado were down 12% at 699.20 pence in London on Tuesday morning, taking its year-to-date stock drop to 58%. The wider FTSE 100 index has risen 0.8% over that same period.
Its performance this year is a far cry from its pandemic outperformance. The stock is currently trading at levels not seen since May 2018.
"The core business of Ocado Retail is delivering jam to its customers today but after another trading disappointment shareholders in the business are once more left with a story that promises jam tomorrow," says AJ Bell investment director Russ Mould.
Ocado Retail is a joint venture between Ocado and Marks & Spencer Group PLC.
For the 13 weeks to August 28, revenue edged up 2.7% to GBP531.5 million, with average orders per week rising 11% to 374,000. Ocado also flagged "record numbers" of new customers. However, the average basket value was down by 6% in the period, with a greater decline experienced later in the quarter.
"Notwithstanding positive customer growth, the accelerating trading down and smaller baskets, particularly over the last few weeks, mean that we now expect to see a small sales decline in FY22 and close to break-even Ebitda," said Ocado.
In Ocado's half-year results in July, it had guided to low single-digit growth at Ocado Retail for the full-year and a low single-digit margin.
UBS had expected 2% sales growth and an Ebitda figure of GBP46.8 million, and said Ocado's new guidance implies a loss-making second half.
"We expect a negative reaction as investors are likely to see this as a disappointment given the reiteration of guidance at Ocado Group's first-half results," said UBS.
Separately, supermarket industry survey data from Kantar compounded worries over the effect of the cost-of-living crisis on grocers.
Kantar said that grocery price inflation has hit a new record of 12.4% in August, and there seems "no end in sight".
Sales at German discounters Aldi and Lidl soared 19% and 21% respectively in the 12 weeks to September 4, and both gained market share. Sales at Tesco and Sainsbury's both rose, by 1.9% and 1.5% respectively, but this lagged wider industry growth of 3.8%, and both shed market share.
Encouragingly, Ocado's market share was unchanged at 1.7%, while sales rose 5.2% year-on-year to GBP515 million.
However, the company on Tuesday cautioned that energy prices and other inflationary pressures have resulted in customers "trading down" and cutting down on the number of items in their trolley.
It warned that energy costs are expected to increase its cost base by up to GBP25 million compared with the prior year, and an increase in dry ice prices will add up to a further GBP20 million.
"These impacts are expected to further weigh on profitability in the fourth quarter," it said.
AJ Bell's Russ Mould said Ocado's update serves as a reminder that online business are not immune to inflationary pressures.
And Tuesday's profit warning has further implications than the joint venture's performance in the UK, he added.
"Ten firms, including Canada's Sobeys, Australia's Coles, America's Kroger, Sweden's ICA, France's Groupe Casino and Spain's Alcampo are all OSP partners with Ocado and they could be forgiven for wondering whether their online push will be a profitable one. Ocado Retail cannot turn a profit in the densely-populated UK and all of those countries are much bigger and so the expense involved in covering distance to deliver the goods is all the greater," said Mould.
Shore Capital said Ocado's online grocery model, using automated warehouses, may have advanced technology, but its financial metrics are not "anywhere near" industry-leading after 22 years of trading.
"We sense that Marks & Spencer will be keen to get a grip of matters," said Shore.
By Lucy Heming; [email protected]
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