Morningstar

Ocado Retail Reports In-Line Q1; Pricing Significantly Lower Than U.K. Grocery Market Inflation

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Securities In This Article
Marks & Spencer Group PLC
(MKS)

Ocado Retail (a 50% joint venture with Marks & Spencer MKS) 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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Ioannis Pontikis, CFA

Director of Equity Research in Europe
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Ioannis Pontikis, CFA, is a Director of Equity Research in Europe for Morningstar*. He covers European grocers and global food and beverage companies like Tesco, Unilever, Nestle, and Danone, and manages a team of eight analysts across the Financials and Consumer sectors. He also leads Morningstar’s Equity Research Valuation Committee, advancing the firm's valuation methodology through projects such as developing new methodologies, refining our valuation model, and enhancing the efficacy of our ratings.

Before joining Morningstar in 2017, Pontikis spent six years on the buy-side, co-managing a $100M long/short equity fund and leading teams in applying machine learning to stock and equity factor selection models. He developed the fund's valuation and risk assessment framework, achieving strong risk-adjusted performance. Prior to this, Pontikis worked at Nestle S.A. in Athens, focusing on financial reporting, budgeting, and auditing proposals to improve processes.

Pontikis research has appeared in numerous media outlets including Bloomberg, CNBC, Reuters, Guardian, Frankfurter Allgemeine Zeitung among others.

Pontikis holds a bachelor’s degree in business administration from the University of Piraeus’s and a master’s degree in accounting and finance from the London School of Economics. He also holds the Chartered Financial Analyst® designation and studying towards an advanced post-masters degree in portfolio and risk management.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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