Will Ocado shares recover?

Shares in Ocado fell 8% on Thursday after the online groceries provider cut growth forecasts at its retail arm. In its first-quarter trading update, the company said first-quarter sales at Ocado Retail - its joint venture with Marks & Spencer - were down 5.7% as UK grocery market revenues dipped by 4%. This was despite them being up 31.7% versus sales in the same period two years ago in 2020.

The company blamed tough comparative figures - last year’s first-quarter was during the second major lockdown. However, management also said that the average basket size of £124 in the quarter was 15% lower as “customer behaviours return towards pre-Covid levels.”

Ocado trims full-year forecasts for the retail business

Ocado cut sales growth guidance for the division for the full-year from previous estimates of in the “high-teens” to “closer to 10%”. It says that the scale of food price inflation and impact on customers from the rising cost of living – especially in terms of energy price hikes - is “difficult to predict.” The company is also being hit by rising commodity and energy prices due to the Russian invasion of the Ukraine.

Despite the challenges the industry is facing and the “softening market overall,” chief executive of Ocado Retail, Melanie Smith, said the past quarter had been “encouraging”. “Active customers have increased by 31%, demonstrating the continued strong appetite for Ocado's unique and market-leading brand of online grocery,” she told investors.

“Of course, as we have seen since the end of COVID restrictions, the value of the average basket and shape of the week continue to normalise as we return towards the rhythm of our pre-COVID lives.”

Smith believes that the “long term… the trajectory of growth remains positive.” While the retail business only makes up a small part of Ocado’s valuation, analysts at Barclays said that the news was "clearly negative for sentiment".

“For the most part it's 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," noted Russ Mould, director of investment at AJ Bell. "Back then it had been a beneficiary of lockdown and the enforced need to do grocery shopping online.”

Ocado’s ambitious expansion plans

The online retailer’s new customer fulfilment centre is set to open in Bicester this year, increasing orders by 30,000 a week at peak capacity. It says its new Purfleet and Andover centres are now operating at more than 40,000 and 25,000 orders a week – but just at half capacity. In addition, another of its Zoom facilities is set to open in Canning Town in London in the spring and more are planned.

The company previously warned at its full-year results in February that the £800m cost of overseas expansion would dent profits in 2022.

Ocado shares remain in the red

After reaching a three-year high of 2886p in January 2021, the shares are down 61% to just 1139p. Ocado was one of the pandemic’s winners but now it admits its customers are buying less from the retailer and eating out more often.

The company remains in the red, with losses tripling to £176.9m last year from £52.3m in 2020 and an ambitious expansion plan in the works. In fact, Ocado has never made a profit since launching in 2000, although it still has £1.5bn in the bank.

In time, the shares could recover. But with rampant inflation, rising energy costs and war in the Ukraine, things could get worse before they get better.

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