Ocado – Retail sales down and forecast down as costs and weaker demand weigh
Ocado Group PLC (LON:OCDO) (the joint venture with Marks & Spencer) saw sales fall 5.7% in the quarter to £564.7m. This reflects strong sales in 2021, boosted by the pandemic. Sales for the wider UK food market were down 4%. Average orders per week increased by 11.6% to 367,500, but this was more than offset by a 15% drop in average basket size (£124) as customer behaviors returned to low levels. ‘before covid.
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Bicester’s Customer Order Fulfillment Center (CFC) is set to open this year, adding capacity of 30,000 orders per week in the second half. The Purfleet and Andover sites have reached around half of their maximum capacity, now operating at a combined total of 65,000 orders per week. A new Zoom facility (same day delivery) is set to open in Canning Town this spring, with other locations in the works over the next 12 months.
The group saw a “significant” increase in a range of costs from raw materials to energy, passing them on to customers in the form of higher prices where possible. Additional headwinds from lower demand and changing behaviors mean that full-year revenue growth is expected to be lower than the previously guided mid-teens, at around 10%. Underlying profit margins (EBITDA) will also be under pressure.
Shares fell 7.4% after the announcement.
Benefits of the Ocado group
Matt Britzman, equity analyst at Hargreaves Lansdown:
“The drop in retail sales from Ocado Group’s joint venture with Marks & Spencer is not necessarily a surprise. The comparative period last year saw the boom in online grocery shopping as lockdowns spread across the country. Now that we are out of it, consumer behaviors are returning to more normal levels. Stocking up on large grocery orders was not as sticky as Ocado might have liked, resulting in a 15% drop in average basket size.
What’s more worrying is lower revenue forecasts and a warning that margins will come under further pressure. Falling overall demand in the UK grocery market and a consumer base returning to eating out are not new headwinds, but with the added pressure of significant cost increases, roughly in all areas, sales growth forecasts were dropped by about 5 percentage points.
All is not bleak, new distribution centers are progressing which will add additional ordering capacity for the group. Further progress is also being made on same-day delivery capability, which should be a real benefit if the group can deliver on this proposition well. But there’s no denying that the near term looks tough, and today’s market reaction reflects that.
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