Company Reports

Ocado Retail, a joint venture between Ocado Group and Marks & Spencer, reported a first-quarter trading update for the 13 weeks to March 3, 2024, with retail revenue up 10.6%, including volume growth up 8.1% and the average sales price, or ASP, up 2.2%. The ASP was lower than market inflation, reflecting the online grocer's efforts toward value perception. Ocado Retail's good performance was driven by: 1) customer growth of 6.4% to 1,018,000, 2) growth in average orders per week of 8.4% to 414,000, and 3) the average basket value increased by 2.1%—in turn due to the higher ASP (lower than inflation) with a slightly lower basket size at 45 items per order (down 0.2%). The company maintained 2024 guidance: it expects Ocado Retail to grow at a high-single-digit rate versus 8% in our model and EBITDA margin to be around 2.5%.

Ocado Retail, a joint venture between Ocado Group and Marks & Spencer, reported a fourth-quarter trading update for the 13 weeks to Nov. 26, 2023, with retail revenue up 10.9% (versus 5% in the first half and 7.2% in the third quarter) including volume growth up 4.8% and the average sales price up 5.4%. The ASP was lower than market inflation, reflecting the online grocer's efforts toward value perception. Ocado Retail's good performance was driven by: (1) customer growth of 5.9% to 998,000, (2) growth in average orders per week of 6.3% to 407,000, and (3) the average basket value increased by 3.8%—in turn due to the 5.4% higher ASP (lower than inflation) with a flat basket size at 44 items per order, which was stable sequentially. The company maintained 2024 guidance: it expects Ocado Retail to grow at a mid-single-digit rate versus 5% in our model and EBITDA to be positive, mainly driven by improved capacity utilization.

In a fiercely competitive United Kingdom retail marketplace Marks & Spencer Group's underperformance is yet another sign of the difficulty in developing competitive advantages in the retail sector, leaving it exposed to disruption from new players such as price-led discounters and online retailers. When new management took over in 2016, a fresh transformational plan was implemented. Although slow at the beginning, progress has been material postcoronavirus, with the company aggressively slashing costs at a rapid pace in light of strong headwinds for its nonfood business caused by pandemic-driven lockdowns.

Marks & Spencer reported another robust trading update for the third quarter of fiscal 2024. Group sales were up 7.2%, driven once again by food sales, which were up 10.5% (like-for-like sales up 9.9%), driving volume and market share gains. This rendered Marks & Spencer the top-performing grocer in volume growth terms over Christmas and the third quarter with growth of 7%, driven by more customers being served over this period. The clothing and home division grew by 4.8% (like-for-like sales up 4.8%) with average selling price growth contributing the most and driven by fewer promotions. International sales were disappointing, down 6.4%, driven by the planned timing of shipments in the Middle East and Asia and more challenging market conditions in India. Management remains cautious about its outlook. We don't expect to materially change our GBX 185 fair value estimate for Marks & Spencer after accounting for third-quarter results. Shares trade in 2-star territory.

Marks & Spencer reported another robust set of results in its fiscal 2024 half-year. Group sales were up 10.8% driven once again by food sales, which were up 14.7% (like-for-like sales up 11.7%), driving volume and market share gains against mainline grocers. The clothing and home division grew by 5.7% (like-for-like sales up 5.5%) with resilient full-price sales and the click-and-collect channel (reduced fulfillment costs) contributing to improved profitability. International and Ocado Retail sales were up 3.9% and 6.9%, respectively. On profitability, the adjusted operating margin recovered to 4.3% from 2.2% last year in food, driven by volume growth and manufacturing efficiencies. Margins in clothing and home also recovered to 12.1% from 9.8% last year, supported by a higher proportion of full-price sales (82%), cost-savings in the logistics network, and lower freight rates than anticipated. Management remains cautious about its outlook and said it expects profit before tax and adjusting items to be weighted toward the first half. Profit-before-tax and adjusting items were ahead at GBP 360.2 million versus GBP 205.5 million last year. Marks & Spencer's share of Ocado Retail's net income-to-group results was negative GBP 23.4 million due to the continued effect of costs related to new and excess capacity. Given the widespread improvement in operating performance across the business and a stronger balance sheet, and as previously announced, the firm is restoring a modest annual dividend to shareholders (GBX 1 per share). We don't expect to change our GBX 185 fair value estimate for Marks & Spencer after accounting for these results. Given the strong beat in top-line growth and profits, shares were up as high as 9% intraday, pushing the stock further into 2-star territory.

Ocado Retail, a joint venture between Ocado Group and Marks & Spencer, reported a third-quarter trading update for the 13 weeks to Aug. 27, 2023, with retail revenue up 7.2% (versus 5% in the first half) and a return to positive volume growth in the last month of the quarter. Ocado Retail's good performance was driven by: 1) customer growth of 1.5% to 961,000; 2) growth in average orders per week of 1.9% to 381,000; and 3) the average basket value increasing 4.2%—in turn due to 8.4% higher average selling price (lower than inflation), offset by smaller basket sizes (at 44 items per order, stable sequentially). The company maintained 2023 guidance, expecting Ocado Retail to grow at a mid-single-digit rate (versus 5% in our model) and be marginally positive, mainly driven by a second-half return to volume growth and improved capacity utilization.

Marks & Spencer released a short ad hoc trading update for the first 19 weeks of the year (ended Aug. 12, 2023) reporting "continued market share growth" in both the clothing & home and food businesses. More specifically, like-for-like food sales grew over 11% while clothing & home sales were up over 6% with strong growth in stores and lower-than-expected stock into sale. Consequently, group operating margin has continued to be robust with the company now expecting profit growth in the year and the interim results (interim results will be reported on Nov. 8, 2023) to show "significant improvement against previous expectations." That said, Marks & Spencer remains cautious for the rest of the year as the economic outlook remains uncertain.

Marks & Spencer reported another robust set of results in fourth-quarter 2023. Group sales growth was 9.9% (versus 8.3% in our model) driven by food sales, which were up 8.7% (like-for-like sales up 5.4%), and the clothing and home division, which grew robustly by 11.5% (like-for-like sales up 11.2%) both ahead of our expectations (food sales up 6.5% and clothing and home sales up 11% in our model). Management remains cautious on its outlook, adding it expects modest growth in revenue (versus up 3% in our model) with cost inflation and wage rises to offset the delivery of over GBP 150 million in cost-savings from the firm's structural cost-reduction program. International sales were up 11.2% with profits recovering despite the impact of the exit from Russia and European Union border-related costs. Profit-before-tax and adjusting items were ahead at GBP 482 million versus GBP 420 million in our model with the main driver of the beat being stronger-than-expected profitability in U.K. food and U.K. clothing and sales (GBP 572 million versus GBP 522 million in our model). Marks & Spencer's share of Ocado Retail's net income-to-group results was negative GBP 29.5 million as expected (negative GBP 20 million in our model). Therefore, management expects adjusted profit before tax for the year to start from a lower base (GBP 70 million-GBP 80 million lower than guidance of GBP 500 million adjusted profit before tax versus GBP 422 million in our model). Given a widespread improvement in operating performance across the business and stronger balance sheet, the firm also expects the board to restore a modest annual dividend to shareholders in November, in line with our estimates (we model a GBX 5 dividend in fiscal 2024). We don't expect to materially change our GBX 185 fair value estimate for Marks & Spencer after accounting for these results. Given the strong beat in top-line growth and profits, shares were up as high as 13% intraday, moving the stock into 3-star territory.

In a fiercely competitive United Kingdom retail marketplace Marks & Spencer Group's underperformance is yet another sign of the difficulty in developing competitive advantages in the retail sector, leaving it exposed to disruption from new players such as price-led discounters and online retailers. When new management took over in 2016, a fresh transformational plan was implemented. Although slow at the beginning, progress has been material postcoronavirus, with the company aggressively slashing costs at a rapid pace in light of strong headwinds for its nonfood business caused by pandemic-driven lockdowns.

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.

Ocado Group reported fiscal 2022 results with group revenue marginally up 0.6%, driven by Ocado Retail (revenue down 3.8% versus down 2.5% in our model, reflecting the unwinding of coronavirus shopping behavior and accelerated by the cost-of-living crisis in the U.K.) that more than offset strong growth coming from the solutions business (U.K. solutions and logistics up 13% and international solutions up 122%). Ocado Retail's revenue decline was the result of a lower number of units purchased per basket (to 46 from 52 in 2021, an 11.5% decline), which only partially recovered from the impact of a 4.5% increase in average selling prices (inflation-driven), resulting in smaller average baskets (to GBP 118 from GBP 129 in 2021, an 8.5% decline). On the positive side, active customers continued to grow to 940,000 (up 13%) with the fourth-quarter exit showing stronger conversion to maturity. On international solutions, 12 sites and 38 live modules are now live across partners, up from 4 and 12 respectively in fiscal 2021. On underlying efficiency, units picked per hour, a metric that reflects efficiency in fulfillment centers, improved to 175 from 170 at mature sites, with the average for all Ocado Smart Platform sites now at 184. Drops per van per week, a metric that reflects last-mile delivery efficiency, has declined to 176 from 177, partially reflecting a decision taken by the company to maintain surplus vans to mitigate supply uncertainty (deliveries per van per shift improved by 10% in the first half, but the company didn't provide a number for the full year). A group EBITDA loss of GBP 74.1 million compares with a profit of GBP 61 million in 2021 and primarily reflects lower scale and cost inflation in Ocado Retail (to GBP 4 million loss from GBP 150.4 million profit in fiscal 2021), with the other two segments reporting largely unchanged EBITDA numbers versus 2021. We maintain our GBX 1,550 fair value estimate and no moat rating for Ocado.

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.

Marks & Spencer reported strong third-quarter results. U.K. sales growth (up 9.7%) was driven by both food sales, which were up 10.2% (outperformed the market both on volume and value in the four-week Christmas period), and the clothing and home division (highest market share in seven years according to the company), which grew robustly by 8.8%. Management remains cautious on its outlook, as cost pressures continue to be elevated, but the company expects to annualize some cost increases seen in last year's third quarter. As a reminder, in 2023, the business will not receive business rates relief (about GBP 60 million) and Marks & Spencer's share of Ocado Retail's net income to group results is expected to be negative. As a result, management expects adjusted profit before tax for the year to start from a lower base (GBP 70 million-GBP 80 million lower than guidance of GBP 500 million adjusted profit). We expect a less constructive backdrop in fiscal 2023 (fiscal year-end: March 2023), as cost pressures from a challenging market environment should continue to have an impact on consumer spending patterns, especially for discretionary items. We don't expect to materially alter our fair value estimate for Marks & Spencer, as profit guidance and a softer short- to medium-term outlook should be offset by the time value of money as we roll our model to account for this set of results. Shares trade in 4-star territory.

Marks & Spencer reported mixed fiscal 2023 half-year results. U.K. sales growth was driven by both food sales, which were up 5.6%, and the clothing and home division, which grew robustly by 14%. More important, group operating profit before adjusting items came in weak at GBP 280.7million, of which GBP 243.2 million was in the U.K. and GBP 39 million was in international. Trading in the first four weeks of the second half is in line with recent trends, with clothing & home sales up 4.2%, food sales up 3.0%, and international up 4.1%. Management remains cautious on its outlook, as cost pressures continue to be elevated but the company expects to annualize some cost increases seen in last year's third quarter. In 2023, the business will not receive business rates relief (about GBP 60 million) and M&S' share of Ocado Retail's net income to group results is expected to be negative. As a result, it expects adjusted profit before tax for the year to start from a lower base (GBP 70 million-GBP 80 million lower than guidance of GBP 500 million adjusted profit). We expect a less constructive backdrop in fiscal 2023 (fiscal year-end: March 2023), as cost pressures from a challenging market environment should continue to have an impact on consumer spending patterns, especially for discretionary items. We don't expect to materially alter our fair value estimate for M&S, as profit guidance and a softer short- to medium-term outlook should be offset by the time value of money as we roll our model to account for this set of results. Shares trade in 4-star territory.

In a fiercely competitive United Kingdom retail marketplace Marks & Spencer Group's, or M&S, underperformance is yet another sign of the difficulty in developing competitive advantages in the retail sector, leaving it exposed to disruption from new players such as price-led discounters and online retailers. When new management took over in 2016, a new transformational plan was implemented. Although slow at the beginning, progress has been material postpandemic, with the company aggressively slashing costs at a rapid pace in light of strong headwinds for its nonfood business caused by pandemic-driven lockdowns.

Ocado Retail reported a third-quarter trading update with sales up 2.7% (up 42% compared with the prepandemic period) driven by a strong increase in new customers (up 23% to 946,000), which in turn boosted the number of average orders per week by 10.7%. This nonetheless was partially offset by smaller baskets (at GBP 116 down 6%, approaching prepandemic levels) and noticeable downtrading (average selling price increased by 5% composed of 7% inflation and negative 2% decrease due to customers buying lower-priced products), as customers are seeking value-for-money items in response to the rising cost of living in the U.K. In addition to downtrading, the average number of items per basket during the quarter was 45, down 10% versus a year ago. The company called out cost pressures (energy and dry ice), which now expect to weigh on profitability in the fourth quarter. The grocer expects the added burden from higher energy costs to be GBP 20 million to GBP 25 million (at fiscal-year 2021 consumption levels) and GBP 15 million-GBP 20 million for dry ice (used to keep food fresh in transit). Hence, Ocado downgraded its full-year guidance for the business to a "small sales decline and close to breakeven EBITDA" versus previous guidance of positive low single digits for both. Lower profitability is also a function of deleveraging with new capacity coming online (four new CFCs opened since the beginning of 2021) during a period of slowing/declining demand. Growth guidance implies mid-single-digit growth in the fourth quarter. As a result, in intraday trading, shares were down as low as 12% on Sept. 13, pricing in management's cautious growth/inflation outlook and a second profit warning for the year. We expect to reduce our GBX 1,870 fair value estimate for Ocado by a low-double-digit percentage after incorporating the aforementioned growth and cost headwinds.

Ocado Group reported first-half results with group revenue down 4%, driven by Ocado Retail (revenue down 8%, reflecting tough comps and the rising cost of living in the U.K.) that more than offset strong growth coming from the solutions business (U.K. solutions and logistics up 10.7% and international solutions up 120%). Ocado Retail's revenue decline was also a function of smaller average baskets (to GBP 120 from GBP 138 in first-half 2021, a 15% decline), which was only partially recovered by the impact of a 3% increase in average selling prices. On the positive side, active customers grew to 867,000 (up 12%) with the net promoter score for ocado.com outperforming other online grocery sites by 25 percentage points. On solutions, 18 sites including two microsites are now live across six partners and five countries out of the 58 customer fullfillment centers already announced. The firm said despite ongoing challenges in global supply chains all projects have been delivered on time and on budget with partners reporting leading customer satisfaction metrics. On underlying efficiency, units picked per hour, a metric that reflects efficiency within fulfillment centers, improved to 174 from 172 at mature sites, with Andover and Purfleet consistently achieving above 200. Drops per van per week, a metric that reflects last-mile delivery efficiency, has declined to 177 from 183, reflecting a decision taken by the company to maintain surplus vans to mitigate supply uncertainty (deliveries per van per shift improved by 10%). Group EBITDA loss of GBP14 million compares with a profit of GBP 61 million in first-half 2021 and primarily reflects lower scale and high-cost inflation in Ocado Retail (GBP 72 million EBITDA reduction), which was partly offset by the release of management's long-term incentive provisions. The company reiterated 2022 guidance and said it continues to target further solutions deals. We maintain our GBX 1,870 fair value estimate and no moat rating.

Marks & Spencer reported an in-line 2022 full-year set of numbers. U.K. like-for-like sales growth was up 20.5%, driven by both food sales, which were up 10.8% (excluding franchise and hospitality up 14.7%), and the clothing and home division, which rebounded strongly by 48.7%. More important, group operating profit before adjusting items came in at GBP 709 million, of which GBP 608 million was in the U.K. and GBP 73.6 million was in international. Management remains cautious on its outlook, as cost pressures will become progressively steeper in fiscal 2023 because of supply chain disruptions and rising labor costs driving declining real incomes for consumers for at least the remainder of the financial year. In 2023, the business will not receive business rates relief (about GBP 60 million) and M&S' share of Ocado Retail's net income to group results is expected to be minimal (GBP 13.9 million in fiscal 2022) because of capacity investments. As a result, it now expects adjusted profit before tax for the year to start from a lower base (GBP 70 million-GBP 80 million lower than guidance of GBP 500 million adjusted profit). We expect a less constructive backdrop in fiscal 2023 (fiscal year-end: March 2023), as cost pressures from supply chain disruptions and rising labor costs should continue to have an impact on consumer spending patterns, especially for discretionary items. We don't expect to materially alter our fair value estimate for M&S, as lower profit guidance and a softer short- to medium-term outlook should be offset by the time value of money as we roll our model to account for fiscal 2022 results. Shares trade in 4-star territory.

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.

We don't expect to change our fair value estimates for our European food value chain coverage list due to the recent Russia-Ukraine conflict.