Ocado’s active customer growth and average basket value were robust in the first half of the year, but its upcoming third quarter earnings update will reveal whether demand has come under pressure in the three months to the end of August.
With inflation and rising food prices forcing consumers to shop around for bargains, the question facing Ocado [OCDO.L] when it reports third quarter earnings on 13 September is whether it has been able to compete with its more affordable rivals.
Revenue for the first half of the year fell 4.4% to £1.26bn. Despite an impressive 119.9% increase in revenue generated by its international solutions segment to £58.5m, the total figure was dragged down by an 8.3% decline in UK retail sales to £1.12bn.
The average basket value fell 13% from £138 in the first half of 2021 to £120. The company put this down to “a challenging trading environment” and “the cost of living crisis compounding the impact of changing customer shopping behaviour trends towards shopping smaller baskets”. On a lighter note, the number of active customers — those that used Ocado in the past 12 weeks — rose 12% year-over-year to 867,000.
Investment in building out its fulfilment centres to ramp up production, as well as higher costs attributed to fuel and jobs, led to a pre-tax loss of £211.3m, much wider than the loss of £27.9m reported in H1 2021.
The Ocado share price has cratered to 756.8p at the close on 9 September, down 54.9% year-to-date and 15.1% in the past month.
Third quarter sales in focus
Despite the decline in retail sales in the first half and the ongoing impact of the cost of living crisis, Ocado left its full-year revenue guidance unchanged. It expects to see low single-digit growth.
When the company provides trading results for the third quarter on 13 September, it’s possible that sales could fall sharply year-over-year. The UK’s consumer price index has continued to hit record highs since the last trading update in May, topping 10.1% in July and squeezing household disposable income even further.
Average basket size and active customer growth numbers should also give investors an insight into how the company is coping with inflationary pressures. However, any sign of weakness could potentially lead the company to downgrade its full-year forecast.
The company also said back in May that it wouldn’t require further financing for the foreseeable future as it expects to turn cash flow positive in the medium term. Investors will be hoping this is still the case when the third-quarter results are released.
The path to long-term growth
Beyond this week, Ocado believes it’s laying down a “clear path” to at least £6.3bn in revenue and £750m in EBITDA over the next four to six years. There will be risks, though. Ocado is spending heavily to expand rapidly. It expects full-year capital expenditure to be roughly £800m, with £366.8m being spent in the first half.
Hargreaves Lansdown equity analyst Matt Britzman wrote in a research note in July: “Ocado has a pretty amazing product. It’s the only global provider of an end-to-end, online grocery platform. That's an enviable position. As the group builds scale and partnerships mature, profits and free cash should flow.”
Britzman added that the stock “trades a decent way below its longer-term valuation. We share the cautious sentiment given the uncertain market but see a pathway taking shape to create long term growth”.
Last week, Barclays analysts raised their rating for Ocado from ‘underweight’ to ‘equal weight’, although it cut its target for the Ocado share price dramatically from 1,500p to 775p. In a note to clients seen by Proactive Investors, they wrote: “the balance of upside and downside risks is now more evenly poised".
Ocado has three ‘buy’ ratings, two ‘hold’ ratings, and one ‘sell’ rating, according to MarketBeat data. The consensus price target of 1,648p implies a 117.8% upside from the 9 September closing price.
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