Q4 Trading Update With EBITDA Investments in FY 2022 to Support Growth; ITC Trial in Favour of Ocado

Ocado Retail, a joint venture between Ocado Group and Marks & Spencer, reported a fourth-quarter trading update with revenue down 3.9% (up 31.6% versus 2019). Within this, customer orders per week were up 9% while the average basket fell 12% to GBP 118 (still up 13% versus 2019). The number of orders were affected by labour shortages and the guided temporary reduction in capacity at the Erith customer fulfilment center, or CFC, and helped by the strong increase in active customers to 832,000 (a 22% increase). The average basket, on the other hand, was mostly affected by the normalisation of customer behaviour as people return to the office and spend less time at home. On capacity rollout, the Erith CFC has returned to prefire live peak-day capacity levels while the new facilities at Andover and Purfleet are operating at 25,000 and 35,000 opw out of an expected total at maturity of 60,000 and 85,000 respectively, with the cadence of ramp-up being the fastest recorded to date, according to Ocado. 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 a further three sites planned in second-half 2022. As a reminder, Ocado Zoom sites generate about GBP 20 million revenue and can offer up to 10,000 stock-keeping units. Guidance for fiscal 2021 is unchanged. For fiscal 2022, Ocado expects strong midteens retail revenue growth, driven by capacity rollouts and higher investments of around GBP 50 million to support growth (higher Ocado smart platform fees, marketing spending, and labour shortages). The company also stated its "ambition for EBITDA margin to rebuild toward 2021 levels (6.5%) following a significant year of investment in 2022." We don't expect to make material changes to our GBX 1,870 Ocado fair value estimate. Shares trade in 3-star territory.