Ocado slumps as inflation hurts profit margins; weak first half of 2023 beckons

By Geoffrey Smith

Investing.com -- Shares in Ocado (LON:OCDO) fell sharply at the open on Tuesday after the logistics and grocery group said its joint venture with Marks and Spencer (LON:MKS) suffered from inflation and the return of in-store shopping after the pandemic in the three months through November.

Ocado Retail's revenue in the period was up only 0.3% from a year earlier, as customers pared back their orders in response to sharp rises in prices that crimped disposable income. While overall orders were up 1.9%, the average order value fell 1.3%, as a 7.6% increase in prices was offset by an 8.3% drop in the number of items per order.

Ocado Retail has traditionally been at the top end of the price range of the U.K.'s supermarkets and has consequently had less scope to raise prices further. That has put pressure on its profit margins, although it has allowed the company to raise its market share to 12.3% as of the end of 2022, from 11.7% a year earlier.

The company said it expects little or no volume growth in the first half of the current year, owing to strong comparatives from the start of 2022, when people were still more inclined to order online due to the pandemic. For the full year, it expects revenue growth of around 5%, and "marginally positive" earnings before interest, taxes, depreciation and amortization. EBITDA is expected to be negative in the first half of the year, improving later as the comparison base becomes more favorable.

Morgan Stanley analysts said the numbers were "disappointing" and noted that the forecast for the retail JV left some doubt over whether it would achieve the milestones needed to unlock another £190 million (£1 = $1.2224) in payments from Marks & Spencer in 2024.

That forecast appears all the weaker, given that the company posted a 15% year-on-year increase in sales at the start of its fiscal 2023 year, in the key period leading up to Christmas.

Ocado stock, which had risen strongly to start the year after positive updates from rival grocery chains, slumped over 10% in the first 20 minutes of trading. By 03:45 ET (08:45 GMT), it had recovered slightly to be down only 6.9%.