Ocado Retail: Good Q3 Performance Despite Challenging Backdrop, Guidance Maintained

Ocado Retail, a joint venture between Ocado Group and Marks & Spencer MKS, 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.

We don’t expect to change our GBX 1,550 fair value estimate for Ocado. After a volatile period for the share price, reaching a low of GBX 380 in June of this year and bouncing back strongly over the last three months at around GBX 800 levels, shares are trading in 4-star territory.