The Ocado [OCDO] share price has slumped considerably from its coronavirus pandemic highs. The online grocery company has been faced with rising costs and lower consumer demand as inflation squeezes customers’ pockets, which is expected to put pressure on its upcoming third-quarter earnings report.
The stock has fallen 55.2% year to date, closing at 751.2p on 8 September, as a weaker macroeconomic environment weighs on investor sentiment. This year’s decline takes the total loss since the stock’s September 2020 highs of 2,895p to 74%. The group, which has a substantial position in online retail and warehouse operations, has struggled amid the slowdown in consumer spending. Ocado also faces higher food, energy and labour costs.
Competitors within the retail space have struggled so far this year, with the share prices of Tesco [TSCO] and Sainsbury’s [SBRY] declining 16% and 25%, respectively. While UK retail giants have experienced the same squeeze on margins as Ocado, their stock prices have performed considerably better.
One factor that has contributed to Ocado’s stock price decline is the fact that it has issued more shares to raise capital for further expansion in the last few months, which has diluted current shareholders’ stakes. The group announced at the end of June it sold more than 72 million shares to existing and new investors – raising £578.2m for the company.
Margins decrease in first-half results
In July’s half-year results, the group announced that revenue from its retail operations, which accounts for an overwhelming majority of total revenue, decreased 8% year-on-year.
Ocado attributed this to lower average basket values, which were 13% lower year-on-year, as consumers purchased fewer items per visit. The retailer cited the rising cost of living and normalisation of consumer behaviour as Covid-19-related restrictions eased.
Revenue from the group’s UK solutions and logistics operations rose 11% in the first half of 2022 compared to 2021. However, higher than usual costs and investments meant that pre-tax earnings from its solutions business fell to £28.6m from £30.1m the year before. Higher costs also contributed to a 70% year-on-year decrease in pre-tax earnings from the group’s retail business, from £104m to £31m.
Ocado confirmed the construction and opening of six customer fulfilment centres as part of the group’s international solutions business, including four new sites in the US for NYSE-listed retail company, Kroger [KR]. Ocado’s international solutions revenues more than doubled year-on-year, to £59m. Investors will hope for more good news on this front in Tuesday’s Q3 results.
Ocado works to grow non-core business
Ocado has slowly been attempting to grow businesses beyond its core retail operations. The group’s online grocery business, operated through a joint venture with Marks & Spencer [MKS], contributed some 89% of total revenue in the first half of 2022.
As part of efforts to realise new cash-generating assets within its international solutions business, Ocado is in the process of fitting out more than 50 customer fulfilment centres for supermarket clients across the globe. Its biggest client, Kroger, is expected to require 20 centres, with each costing tens of millions of pounds.
The liquidity raised earlier in the year will be a key source of funding for the development of such centres.
Analysts split on Ocado outlook
While Ocado has faced challenges in signing up new major clients since the end of 2019, Tim Steiner, the group’s CEO, noted that it has “never been busier” when it comes to negotiation with potential technology clients. The appeal of this technology includes lower upfront costs for retailers and enhanced efficiency.
By increasing its focus on the solutions and technology side of the business, Ocado can move away from a reliance on its retail arm, particularly as consumers return to brick-and-mortar stores and operating costs remain high.
Ahead of its earnings release on 13 September, analysts are split on Ocado shares. Out of 22 analysts polled by the Financial Times, seven rated the shares a ‘buy’, two believed shares would ‘outperform’, nine have a ‘hold’ rating, while three rated the stock an ‘underperform’, along with one ‘sell’ rating.
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