Online supermarket Ocado (OCDO) wants you to believe its latest trading update is excellent. Yet a near-5% share price decline to 287.8p shows that investors aren’t fooled by bullish statements from the company.
Falling average order size and rising costs are the key reasons behind today’s share price retreat.
Investors may also be disappointed that no new international customers have been announced, as geographical expansion is seen as key to Ocado’s appeal from an investment perspective.
A brief third quarter update reveals a 14.3% surge in group revenue to £344.5m for the thirteen weeks to 27 August, including earnings generated from Ocado’s tie-up with Morrisons (MRW).
Stripping out the Morrisons deal, revenue still rose 13.1% to £312.7m; so far, so good.
However, while average orders per week grew 16% to 254,000, Ocado reports a further 1.2% drop in average order size to £106.25.
‘Consumers are placing more orders but smaller ones - average orders per week rose 16% while average basket size was 1.2% lower at £106.25,’ says Neil Wilson, senior market analyst at ETX Capital.
‘This chimes with Morrisons’ results last week and with what we’re seeing more broadly in the supermarket sector.
‘If consumers are spending less per order it would likely be negative for margins and profit growth, although the average basket size has actually rebounded after dipping to £105.61 last year. Inflation has returned to the supermarket sector a touch but this is down to rising input prices from the weaker exchange rate.’
JAM TOMORROW
Investors are also growing impatient with Ocado’s profit prospects. Chief executive Tim Steiner warns costs will rise in the short term as Ocado invests in its next generation of customer fulfilment centres (CFCs).
‘As channel shift gathers pace we need to take advantage of our industry leadership and so we are scaling up our capacity in our revolutionary new Customer Fulfilment Centre in Andover with the performance of the facility improving week by week,’ says Steiner.
‘At the same time, we are preparing our fourth, and biggest, CFC to date in Erith, set to open in 2018. These investments, while increasing some costs in the short term, will allow us to meet the rapidly growing demand for our services from UK consumers while allowing us to offer the very latest technology to current and future customers of our Ocado Smart Platform.’
Ocado insists its industry-leading technology is setting the bar for customer service and satisfaction.
Recent innovations include Ocado becoming the first UK grocer to offer customers Amazon’s Alexa voice-activated tool, meaning they can verbally modify online grocery orders.
Yet its real value lies in the automated warehousing technology which it hopes to roll out globally with retailers.
In June, following an agonisingly protracted wait, Ocado announced its first deal with an overseas retailer to use its Ocado Smart Platform, although there was disappointment in some quarters that the tie-up was with a mystery regional European retailer rather than a big name global grocer.
‘The value in Ocado is not just growing sales faster than the market, but the technology it owns, and we’re seeing more investment in this side,’ adds Wilson at ETX.
‘Ocado says costs will rise in the short-term, which may be taken as an indicator of negative profit growth in the second half of 2017. Profits have not been great as Ocado keeps ploughing money into its technology.’
