Telegraph today still positive re current Ocado outlook..13 Feb 2022 11:40
Questor: Ocado is well-placed for long-term growth as grocery spending moves to online
Ocado has proved to be an investment of “two halves” since this column determined it was a “risky buy” on March 8 2020. In the first 11 months following our tip, shares in the digital grocery business generated a capital gain of around 150pc as the pandemic raised investor appetite for online-focused stocks and forced many consumers to shift their spending towards digital avenues.
Since then, however, its share price has collapsed by over 50pc since February 2021 so that it now trades just 15pc higher than at the time of our original advice. During that time, investors have increasingly prioritised value stocks over growth shares. Furthermore, investor demand for online-focused firms has moderated as Covid-19 lockdown measures have abated. This has harmed sentiment towards the firm at a time when its profitability has also deteriorated.
Indeed, last week’s full-year results showed that Ocado’s pre-tax losses more than trebled versus the prior year. Higher investment and rising labour costs were major contributors to the firm’s worsening financial performance. While they may persist in the near-term, and could be detrimental to profitability in the current financial year, Questor believes that the long-term growth outlook for the firm remains intact.
Notably, consumers are increasingly shifting grocery spending to online channels. Currently, 12pc of groceries are purchased via digital channels in the UK. By 2025, that figure is expected to reach 18pc. This provides a clear growth opportunity for the firm’s 50:50 UK joint venture with Marks & Spencer, which has generated 42pc sales growth over the past two years.
Similar growth opportunities exist in other developed economies, such as the US, Japan and across Europe, where Ocado has signed partnership agreements with established retailers to provide technology that allows them to sell groceries online. In the US, for instance, online grocery sales as a proportion of total grocery spending increased by two percentage points in 2021. Digital sales now account for 13pc of the total market and are widely expected to grow in popularity as their availability becomes more widespread.
Ocado expects to almost double the number of operational customer fulfilment centres (CFCs), which are essentially advanced warehouses, across its broad range of geographical locations in the 2022 financial year.
This will further diversify the business away from its UK retail operations and, as a larger number of CFCs become operational, the firm could benefit from increasing scale and operating leverage that acts as a catalyst on profitability over the long-run.
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