Ocado Group Earnings: Better Profitability and Upbeat Kroger Operational Update Lift Shares

Ocado Group OCDO reported fiscal 2023 half-year results, with group revenue up 9% and group EBITDA of GBP 17 million both ahead of expectations. Ocado Retail’s good performance (revenue up 5% in line with our full-year estimates) was driven by: 1) solid customer growth of 10.6% to 959,000; 2) growth in average orders per week of 4% to 392,000; and 3) the average basket value increasing 1.5%—in turn due to 8.4% higher average selling price, offset by smaller basket sizes (down 6.3% to 45 items, stabilized at 44 items over the last quarter) and lower frequency of orders due to the U.K.’s cost of living crisis. Segment profitability was EBITDA-positive in each month of the second quarter, with the firm expecting this to continue as capacity utilization of the customer fulfillment centers, or CFCs, improves, materializing into an expectation of marginally EBITDA-positive in the full year (in line with our GBP 6-million retail EBITDA forecast).

Solutions revenue was up 58.9%, on strong growth in average live modules (up 35% to 105, plus two new CFCs live, 25 sites now live) with EBITDA at GBP 5.0 million (versus negative GBP 58.8 million in the first half of 2022). Importantly, Ocado provided an update on the partnership with Kroger, where Ocado has been focusing efforts to improve operational efficiency in their first two CFCs. There are promising initial results such as significantly improved warehouse productivity (units picked per labor hour, or UPH, within the facility up 25%), waste down 30%, drops per van up 10%, and operational cost per order down 15%.

We don’t expect to materially change our GBX 1,550 fair value estimate for Ocado. We believe upbeat commentary on operational progress with the largest and most important solutions client (Kroger) as well as better profitability in the solutions segment in the first half are driving share outperformance this morning (shares are up 14% at the time of writing). Despite this, shares still trade in 5-star territory.