Ocado shares slump after warning lower FY sales as customers tighten belts

Shares in UK online grocery firm Ocado Retail plunged on Tuesday as the company said it expected a small fall in annual sales as customers started to tighten their belts and bought fewer items amid the cost-of-living crisis.

The supermarket, a joint venture between Ocado Group and retailer Marks & Spencer, also said it now expected close to break-even core earnings. It had previously forecast low single digit revenue growth and a low single digit profit margin.

“While customers and orders have grown, consumers are shopping smaller baskets and seeking value-for-money items as they respond to inflationary pressures,” the company said in a trading update on Tuesday.

As a result, the value of the average basket fell 6% in the 13 weeks to August 28, to £116, with a greater decline experienced later in the quarter during the peak summer holiday season, it added.

Cost headwinds (predominantly energy and dry ice) were likely to weigh on profitability in Q4.

“We continue our efforts to help our customers keep their food bills low including investment in price and expansion of the value-for-money own label range,” Ocado said.

Third-quarter sales rose 2.7% to £532m as the firm tipped “even stronger growth” in Q4. Active customer numbers grew 23% year-on-year to 946,000, driving an increase in average orders per week of 10.7%.

“The core business of Ocado Retail is delivering jam to its customers today but after another trading disappointment shareholders in the business are once more left with a story that promises jam tomorrow,” said AJ Bell investment director Russ Mould.

“The Ocado Smart Platforms business still offers undeniable long-term potential, as the company licenses out its warehousing and automation technology, but the core retail model of delivering goods to customers via that online platform is yet to prove it can be profitable.

“The retail business continues to add customers but cannot turn this into a profit. This time the problems are higher costs, notably for fuel and dry ice, and customers either trading down through brands or simply fewer items in the face of the cost-of-living crisis.

“A 2.7% increase in Ocado Retail sales is no great shakes when prices are up 5% and a 10% drop in volumes means the average shopping basket’s value is down 6% year-on-year."

“This is clearly giving patient shareholders pause for thought and the share price plunge suggests their patience may now be wearing thin. The shares are now at their lowest level since May 2018.

Reporting by Frank Prenesti at Sharecast.com