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Outlook downgrade clobbers Ocado share price

Ocado share price: Ocado delivery vans are parked outside a residential address.

The Ocado [OCDO] share price fell 13% when markets opened on Tuesday morning after the grocery delivery firm warned of lower revenue as customers cut back on spending amid the cost-of-living squeeze.

Shares in Ocado hit a four-year low of 670p during intraday trading on 2 September, marking a steep decline from last year's February peak of more than 2,800p. The stock market tumble has mainly been due to investor concerns over profitability as the grocery and technology company faces the challenges of rising prices for raw materials, energy and wholesale goods.

Higher prices

To combat these challenges, Ocado said earlier this year that it would have to raise prices to maintain its margins, but it was unclear whether price increases would offset the higher cost of doing business.

Today's results announcement lend support to these concerns, with the company saying that Q4 sales and profits were likely to be affected by energy cost headwinds. The news sent the shares sharply lower.

Sales grew in Q3, but average basket size fell

Sales increased 2.7% to £531.5m in Q3 as customer numbers swelled 23% to 946,000, partly thanks to a promotion offering new customers £20 off their first shop and free delivery. That helped push up the average number of orders per week by 10.7% to 374,000.

However, customers put less in their virtual trolleys, as the average order value fell 6% from £123 to £116. Faced with soaring inflation price-sensitive shoppers bought less and sought out cheaper items. 

Bosses warned that the retail division, a joint venture between Ocado and Marks & Spencer, is likely to see a small decline in sales for the full year to the end of November, with core earnings set to come in at about break-even. The warning of a decline also sent shares in M&S down 3% in early trading today.  

Revenue downgrade reflected in share price?

The downgrade to the Q4 and full-year outlook wasn't much of a surprise, given the cost-of-living concerns expressed by management earlier this year. Even so, investors have reacted negatively to guidance that the company could struggle to break even on EBITDA.

Yet despite the sell-off, the stock hasn't fallen below the 52-week low that was set on 2 September. The shares are already among the FTSE 100's worst performers this year, suggesting that today's bad news has already been priced in.

Expansion plans

Despite facing challenges, Ocado is adding extra capacity to its network. Its fulfilment centre in Bicester is now fully open, adding 30,000 orders a week at maximum capacity. Canning Town is also increasing its output, while a new site in Leyton opened earlier this month.

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