Ocado Retail Reports in Line Q1; Pricing Significantly Lower Than U.K. Grocery Market Inflation

Ocado Retail (a 50% joint venture with Marks & Spencer) reported a first-quarter trading update with sales up 3.4%. The top-line performance was largely in line with expectations as the company had previously guided to mid-single-digit revenue growth for the year, with "an improving trajectory during the year reflecting a return to volume growth as the challenging comparison to larger volume basket shopping behaviors that remained in early 2022 fades." Top-line performance was supported by continuous additions of new customers (up 13.8% year on year to 951,000), which was not enough to meaningfully move the number of average orders per week (up 3.6%) as frequency of orders fell, offsetting the benefit. Basket sizes have now stabilized at GBP 124, up 0.2% year on year and approaching prepandemic levels, with customers adding a lower number of items per basket (8.3% lower to 45 items from 49 before) in response to a higher cost of living and inflationary pressures (8.3% increase in average selling price per-basket item for Ocado Retail in the quarter, lower than peers with Kantar reporting a record 16.7% grocery price inflation for the period). The company reiterated guidance for mid-single-digit revenue growth and marginally positive EBITDA (versus 5% retail revenue growth and 0.25% retail EBITDA margin in our model). Lower profitability is also a function of deleveraging with new capacity coming online (four new customer fulfillment centers have opened since the beginning of 2021) during a period of declining demand. We maintain our GBX 1,550 fair value estimate for Ocado. As a pure online grocer, Ocado Retail is not as optimally positioned to weather an inflationary/recessionary environment as its brick-and-mortar peers. That said, we believe shares are cheap based on our favorable long-term outlook, which, in turn, is driven by long-term structural opportunities in online grocery and the group's innovative solutions platform.