Challenges Persist in Q4 for Ocado With Cautious Fiscal 2023 Guidance; Long-Term Outlook Intact

Ocado Retail (50% joint venture with Marks & Spencer) reported a fourth-quarter trading update with sales up 0.3% (up 40% compared with the precoronavirus period) for a total revenue number in fiscal 2022 of GBP 2.2 billion versus GBP 2.23 billion in our model. The top-line performance was disappointing as the company had previously guided to mid-single-digit revenue growth for the fourth quarter. Top-line performance was driven by continuous additions of new customers (up 12.9% year on year to 940,000), which was not enough to boost the number of average orders per week (up 1.9%) as frequency of orders fell, offsetting the benefit. Basket sizes continue to fall though at a lower pace (at GBP 117, down 1.3% and approaching prepandemic levels) with customers adding a lower number of items per basket (8.3% lower to 45 items) in response to a higher cost of living and inflationary pressures (7.6% increase in average selling price per-basket item for Ocado Retail in the quarter, lower than peers). The company reiterated guidance for fiscal 2022 EBITDA close to break-even (versus GBP 2 million in our model). Ocado introduced fresh fiscal 2023 guidance for mid-single-digit revenue growth and marginally positive EBITDA (versus 5% retail revenue growth and 0.25% retail EBITDA margin in our refreshed model). Lower profitability is also a function of deleveraging with new capacity coming online (four new customer fulfilment centers have opened since the beginning of 2021) during a period of slowing/declining demand. As a result, intraday, shares were down as low as 6% on Jan. 17, pricing in management's cautious growth/inflation outlook and a sizable top-line miss for the quarter, reflecting low visibility in the short term. We have trimmed our GBX 1,600 fair value estimate to GBX 1,550 for Ocado after incorporating the aforementioned growth and cost headwinds, which more than offset the time value of money.