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Will Ocado share price recover after Q4 results?

Ocado share price: Image of Ocado's warehouse

As investors prepare for Ocado’s fourth quarter (Q4) 2021 earnings report to be released on 14 December, the online retailer has been busy preparing robot-powered warehouses to deal with the upcoming holiday period. The company has hired thousands of software developers in recent months to help run an army of packing robots that will speed up deliverance.

Whether this will be enough to lift investors’ spirits is yet to be seen, especially looking at the lack of uplift following its previous results. The Ocado share price has fallen 28.6% in the year-to-date to close at 1,633.50 on 8 December.  

New warehouses fail to lift the Ocado share price 

To consolidate its position as the UK’s leading premium online grocer, Ocado has been accelerating the development of customer-fulfilment centres (CFCs). As of the third quarter (Q3) 2021 earnings report in September, a new CFC has been opened in Purfleet; the CFC in Andover has reopened; and capacity has been increased at its Hatfield and Dordon sites. In total, Ocado can handle just over 600,000 orders a week. 

The increased capacity helped to offset the impact of a fire at its Erith CFC in July. In the last seven weeks of Q3 2021, revenue declined 19%. Sales for the whole quarter were down 10% year-over-year from £578.8m to £517.5m. Average orders per week rose slightly, however, from 333,000 to 338,000. 

Despite the gathering momentum of CFC openings the Ocado share price declined 1.4% to 1,859p on 14 September when it announced the results. 

The disruption caused by the fire in Erith led to operating losses of about £10m, stemming from the loss of orders and the Erith CFC taking time to ramp-up to full capacity. These losses are expected to adversely affect the full-year EBITDA in the upcoming quarter.  

Can Ocado Retail deliver strong Christmas sales? 

Going into Q4, Tim Steiner, CEO of Ocado Retail, was confident that the company would deliver strong sales growth at Christmas and in the early part of fiscal 2022. Given the company’s “market-leading customer offer[ing] and technology”, Steiner believes that its “long-term outlook is as compelling as ever”. 

With revenue for the nine months to 29 August coming to about £1.9bn, Ocado is well on track to beat last year’s revenue of £2.3bn, says our chief markets analyst, Michael Hewson. In Q4 2020, the company posted sales of £579.6m.

As reported by This is Money, analysts at Jefferies have described Ocado as “the partner of choice” for supermarkets looking to take advantage of the online grocery boom. In an 8 December note to clients, they argue that it makes more sense for supermarkets to partner with a specialist in automation than re-engineer their legacy business models to be ecommerce ready. 

Ocado Retail: A takeover target 

Looking ahead to the upcoming earnings announcement, revenue performance is likely to be a key indicator of how the retail business is operating. Sales in the first quarter of 2021 grew by 39.7%, and the overall growth rate for the first half was 20%. With Q3 revenue impacted by the Erith fire, the fourth quarter should provide a better picture of how Ocado is faring, though lockdowns in 2020 have made retail sales patterns difficult to judge on an annual basis. 

Given the emergence of the Omicron Covid-19 variant, further restrictions could impact demand in the coming months, particularly over the holiday period. Sophie Lund-Yates, an analyst at Hargreaves Lansdown, commented: “The pandemic has turbocharged the shift to online shopping, increasing demand for the kind of technology Ocado specialises in.” 

In her analysis of the Q3 2021 earnings, Lund-Yates praised the company’s “plan to strike while the iron’s hot” and scale up its CFCs and capacity. But she cautioned that the CFCs are a long-term investment, and it will take years to know if the plan will pay off.

“We should be clear,” she said. “We think Ocado has a pretty amazing product. It's the only global provider of an end-to-end, online grocery platform.” 

It’s no surprise then that Ocado Retail has been the subject of takeover chatter. In a research note, Deutsche Bank hinted that Marks & Spencer [MKS] should try to take full control of the joint venture within the next four years by buying the remaining 50% share.

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