Shares in Ocado (OCDO) were the worst performers on the FTSE 100, plunging 9% to £10.97 as the online grocery delivery firm reported a challenging start to its new financial year with consumer behaviour reverting to pre-Covid trends and inflationary pressures persisting.
Reporting a drop in first quarter sales for Ocado Retail, its joint venture with Marks & Spencer (MKS), the online supermarket also issued a weaker outlook due to inflation, warning that 2022 EBITDA margins ‘may be further impacted by the significant increases in energy costs where uncertainty remains’.
For the 13 weeks to 27 February 2022, Ocado Retail’s sales fell 5.7% year-on-year to £564.7 million, with the average basket size down 15% to £124, as the business lapped a ‘challenging’ lockdown-boosted comparative, although sales were 31.7% ahead of the pre-pandemic first quarter of 2020.
In part, Ocado pinned its lacklustre performance on the return of customer behaviours towards pre-Covid levels, reflecting the continued easing of pandemic restrictions and return to more in-office working.
COST HEADWINDS WEIGH
‘Significant increases in raw materials and product cost prices, energy, utilities, and dry ice through Q1 have added further cost headwinds for the grocery industry in the UK’, explained Ocado in its first quarter trading update.
‘Reflecting these challenges, industry data reports that food prices have increased by 4.3% in February, the fastest rate of increase since 2013. Against this backdrop the UK grocery market overall was 4% lower in Q1 than the same period last year.’
With consumers feeling the pinch from the rising cost of living, uncertainties over inflation having ‘increased significantly due to the war in Ukraine’ and given the continued return to pre-Covid shopping patterns, Ocado Retail now sees a full year growth rate ‘closer to 10%’ rather than previous guidance for 15% growth.
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould explained that for the most part it has been pretty tough going for Ocado since the heady days in September 2020 when it reached all-time highs of close to £30 per share.
‘Back then it had been a beneficiary of lockdown and the enforced need to do grocery shopping online.
‘This was seen as a big driver, not only for its own groceries service but also for its solutions platform sold to global supermarkets lacking their own viable internet-based offering,’ said Mould.
However, that excitement ‘gave way to mounting disappointment as the company failed to sign up new clients, ironically blaming the pandemic restrictions which had helped act as a calling card for its services in the first place.
‘Whether it was a ready excuse or genuine obstacle, Ocado’s argument was that being unable to easily fly around the world made it tricky to ink deals.
‘A patent squabble with Norway’s Autostore and a robot fire at its own facility in south-east London took further shine off what had been until then one of the market’s real emerging stars.’
Mould noted that more recently, Ocado has had some more positive headlines, notably winning convincingly the latest leg of its court battle with Autostore and signing a new agreement with an existing client to provide its platform solution in Poland.
‘Today’s trading update covers the UK-based Ocado Retail arm - now a joint venture with Marks & Spencer. While this venture has been a success for both parties, the pressure on margins from rising inflation looks to be a growing issue and will not help Ocado at group level given the solutions business remains heavily loss-making.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
