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Ocado share price hit by inflationary pressures

Ocado share price: The online retailer has been hit by inflationary pressures

Investors will be monitoring the Ocado [OCDO] share price when the retailer releases half-year results on 21 July. The online grocery business boomed during the Covid-19 pandemic, when lockdown restrictions drove many consumers to shop online. 

In September 2020, at the height of the pandemic, the Ocado share price reached a record high of more than 2,900p. Many observers believed that surging demand for home deliveries could mark the start of a prosperous period for the company, which has only managed to turn a profit three times since it was founded in 2000.

However, since then the stock has plummeted to below 800p – a level not seen since late 2018. The firm is currently struggling as inflationary pressures have driven up costs and dampened growth outlooks.

Investors will be hoping that Thursday’s half-year update reveals how the business can regain its pandemic-era form. Yet, with the stock one of the worst performers on the FTSE 100 this year – the Ocado share price is down 48% at 780.40p as of 18 July – it may be a long road back. 

Conditions worsened for Ocado in Q1

In March, Ocado reported Q1 revenue of £564.7m, down 5.7% from the strong comparative of £599.1m in the year-ago period. 

While orders rose by 11.6% for the period, increases in costs – including higher fuel and utility costs, along with increases in production and raw material prices – were cited by the company as challenges. A 4% drop in UK grocery market sales added to its woes. 

The macro-environment for Ocado has only worsened in Q2 as inflation surges to new highs, driving up costs and forcing consumers to tighten their belts. To help cover rising costs, Ocado has said it will have to increase prices. But the company added that it is not confident that higher prices will offset the higher cost of doing business.

Downgraded outlook for the rest of the year

Against this bleak economic backdrop, the business has downgraded its full-year outlook for 2022. In May bosses revised their initial growth target of 10% down closer to low single digits, causing Ocado shares to slip back. 

The decision to lower guidance may have been influenced by the decrease in demand that the business had experienced in Q2 up to that point. Managers of Ocado’s retail operation, which entered a partnership with Marks & Spencer [MKS] in 2019, stated that average basket sizes had fallen by 9% year-on-year. They also indicated that sales had dropped 8% so far for the quarter, a deterioration of the 5.7% decline in Q1. 

Continuing e-commerce expansion 

Despite these headwinds, Ocado retains a strong long-term vision and has taken strides in recent times to continue with the expansion of its operations. In June it raised £578m to fund its growth, with £575m raised via a new share issuing and the additional £3m coming from senior management. The firm plans to use the capital to continue the rollout of its e-commerce technology as it aims to build on the surge in demand that stemmed from the Covid-19 pandemic. 

Alongside this, the retailer announced it had agreed to a £300m revolving credit facility through a syndicate of banks, providing the business with adequate liquidity for its expansion plans. 

Ocado also aims to speed up its investment in innovation, mainly through the construction of customer fulfilment centres (CFCs). It has plans to build over 50 of these across the globe. The creation of one of its largest CFCs in Purfleet last year has aided its capabilities. 

Its Andover CFC, which was rebuilt following a fire in 2019, has also boosted capacity, handling up to  60,000 deliveries per week. Zoom by Ocado, the company’s one-hour delivery service, also expanded its reach recently, opening a new site in Canning Town, east London. 

Ocado’s stock price has levelled off since the trading update at the end of May, with an 831p 50-day moving average, as many investors had already braced themselves for a weakened quarterly performance.

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