Ocado earnings forecast falls short of expectations as customers cut back

Sales at Ocado’s UK retail business inched up towards the end of 2022 but failed to match the growth rates at mainstream supermarkets, while its forecasts for the current year fell short of expectations.

Ocado Retail, the joint venture between Ocado and Marks and Spencer, said on Tuesday it expected sales growth in 2023 to be “mid-single digits” and earnings before interest, tax, depreciation and amortisation to be “marginally positive” — significantly below the £35mn that analysts had forecast.

Hannah Gibson, who took over as chief executive of the venture in September, said there were “opportunities to reactivate customers who hadn’t previously been able to get delivery slots” and to convert some of the “huge fan base” at M&S to ecommerce.

The company’s profit performance in the 12 months ending in November 2023 will determine whether M&S has to pay about £156mn of the remaining deferred consideration, plus interest, for its half-share in the business.

Ocado told analysts it would provide an update on the expected amount payable at its full-year results at the end of February. M&S has previously said it is in talks over the outcome.

Shares in Ocado fell by more than 6 per cent in early London trading. M&S stock was little changed.

Ocado’s sales in 2022 declined 3.8 per cent to £2.2bn, the first such fall in the company’s history, as shoppers reverted to more normal behaviour following the pandemic.

Performance in the final quarter of 2022 continued the trends seen earlier in the year, with more customers driving a 1.9 per cent increase in weekly orders, but with on average 8.3 per cent fewer items in each order.

Sales in the fourth quarter rose 0.3 per cent. Conventional supermarket rivals J Sainsbury and Tesco both increased their sales by about 5 per cent in the same period, and by 7 per cent in the six weeks leading up to Christmas.

Ocado’s sales were up 15 per cent in the five days before Christmas, a period so short that Clive Black at Shore Capital described it as “nonsensical”.

The supermarket experienced much of the same money-saving behaviour that others have reported, including trading down to value lines and a shift from chilled food into frozen. It also said its prices had rise about 7.6 per cent year on year, well below the headline level of food price inflation.

Gibson said the venture “continued to see structural growth” in the market but that “we are currently operating at two-thirds of our capacity and we need to grow into that capacity over the months and years to come”.

Last year Ocado said that two new automated fulfilment centres planned for 2024 and 2025 would be paused until demand had recovered.

Gibson predicted that newly recruited customers “will grow their basket sizes and the Covid reversal will have played out by the middle of the year”, with margins improving in the second half.

Tim Steiner, Ocado’s chief executive and the chair of the joint venture, said the cost of acquiring new customers was also returning to more normal levels.

“The frenzy we were seeing this time last year . . . has receded significantly,” he said, referring to a period of intense promotional activity by immediate delivery ventures such as Getir, Gopuff and Gorillas.

“Costs are heading back to the first 19 years of Ocado’s life and not what we saw at the start of 2022.”


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