After four profit warnings last year, Ocado Group PLC (LSE:OCDO) was the biggest faller on the FTSE 100 for 2022 and some investors have been spying a bargain, with the shares up close to 30% over the four weeks running up to today’s disappointing UK retail update.
This has been the pattern for Ocado shares in recent years, with a perpetual cycle of disappointment and hope that possibly tempts some long-term investors as well as short-term traders.
Some of those investors who have timed their share purchases badly in the past should remember the old stock market adage of ‘buy the rumour and sell the fact’.
Or for Ocado, maybe the sage advice might be to “buy after the profit warning and sell just before results are released”.
On that note, the Ocado Group results will be due on 28 February, when the company will be able to talk again about its Solutions division, which is the real key to its self-proclaimed status as a technology company and therefore the success or failure of its shares.
Delving into the minutiae of this morning’s update for Ocado Retail, the online grocery specialist’s 50%-owned joint venture with Marks and Spencer Group PLC (LSE:MKS), most numbers were worse than had hoped.
Growth in the fourth quarter was much weaker than the “mid-single-digit growth” that management had previously suggested and the City had forecast. Q4 average weekly order growth of 1.9% was well below consensus estimate of 11.6%, while average order size shrank 1.3%, which was less than feared as a 7.6% increase in average selling price offset an 8.3% fall in average items per basket.
For the full year this meant revenue growth of 0.3% was hopelessly distant from the 13.4% that was expected, with basket volumes were down 12.1%, with six fewer items chosen by shoppers on average as well as declining shopping frequency.
On the plus side, Ocado Retail is still expected to post full-year underlying earnings (EBITDA) “close to break-even” – the benefit of being vague in September when it downgraded its guidance from the previous “low single digits”. The blame being put on the headwinds of inflationary costs, higher marketing costs and investments in expanding capacity.
Looking to the new financial year, Ocado Retail started “strongly with record Christmas sales” and while EBITDA for the first half of 2023 is predicted to be negative, it is seen turning positive in the second as the above factors combine with better utilisation of warehouse capacity and lower costs relative to sales, to produce a “marginally positive” figure for the whole year.
UBS analysts said this “marginally positive” guidance for year ahead comes with the latest analyst consensus standing at £16mln, sourced by the company, down from a recent £47.8mln independently gathered average.
Ocado based its claims on the business achieving a 13% rise in orders in a mere five days trading in the run up to Christmas.
This was described as “comedy” by Shore Capital analyst Clive Black, with such a short period being “ludicrous and meaningless”, and hardly the basis to predict anything.
Ocado Retail foresees full-year sales for 2023 growing by “mid single digits”, with basket sizes expected to remain lower in the first half, before the trend comes full circle and the smaller baskets seen in the past six months make for an easier comparison in the second half, with growth in sales volumes and continued effect of price inflation also helping.
Twisting the telescope to look further forward, this is expected to underpin “a strong recovery in 2024” and for sales and earnings to “recover strongly” in the medium term, as further improvements in capacity utilisation and costs-to-sales results in mid-single digit EBITDA margins.
“Investors have long since become bored of profitless prosperity,” said analysts at AJ Bell, “whereby firms claim to be winning the war for customers but then consistently fail to turn those new users into profit”.