Ocado: Cautious Outlook Amid Reopening, Inflation Pressures Drive Lower Guidance; Shares Attractive

Ocado Retail, a joint venture between Ocado Group and Marks & Spencer, reported a first-quarter trading update with revenue down 5.7% (up 31.7% versus first-quarter 2020). Within this, customer orders per week were up 11.6% (higher than 9% growth in the fourth quarter) while the average basket fell 15% to GBP 124, reflecting a gradual normalization of consumer behavior as people return to more in-office working and out-of-home food occasions. This compares with a 4% fall in sales for the U.K. grocery market overall, implying market share losses for Ocado despite a strong increase in active customers to 835,000 (31% increase). On capacity rollout, new facilities at Andover and Purfleet are operating at 25,000 opw and 40,000 opw respectively, out of an expected total at maturity of 60,000 and 85,000. New capacity is coming online in second-half 2022 and first-half 2023 with the opening of Bicester CFC (30,000 opw) and Luton CFC (65,000 opw) respectively. Ocado Zoom, the firm's on-demand solution, expects to add a second site in London in second-quarter 2022 with new sites planned in second-half 2022. Ocado called out the combination of inflation pressures (4.3% in February, "the fastest rate of increase since 2013") and post-coronavirus grocery spending declines as particularly challenging. As a result, Ocado downgraded fiscal 2022 revenue growth guidance to "closer to 10%" from "strong midteens retail revenue growth" previously, as expected gains driven by capacity rollouts and higher investments of about GBP 50 million to support growth (higher Ocado smart platform fees, marketing spending, and labor shortages) will be partially offset by a weaker overall market and significantly higher uncertainties over inflation due to the war in Ukraine. As a result, in intraday trading, shares were down as low as 9% on March 17, pricing in management's cautious growth/inflation outlook. We don't expect to make material changes to our GBX 1,870 fair value estimate for Ocado.