Ocado keeps sales growth in cruise control as food inflation returns
Sales growth at Ocado remained in cruise control in the first quarter of 2017 and while order size continued to shrink it did so at a slower rate.
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Ocado Group
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For the 13 weeks to 26 February the online grocery group generated sales of £352.4m, a rise of 13.1%, exactly the same rate as in the fourth quarter of last year.
Total sales, including Morrison's, rose 13.3% to £384.7m.
Average order size fell by 1.6% to £110.84, a slower rate of decline than in previous quarters, while the FTSE 250 company eyed an end to the supermarket price war.
"While the market remains very competitive, there are the first signs of a change in market pricing dynamics coming through," said chief executive Tim Steiner, though investors would rather he say something about the long-envisioned big international retail customer.
In January Steiner reiterated that the company was in "advanced discussions with multiple potential international partners", but there was no further news of this.
On the outlook for the rest of the year, he reiterated his belief that the company's commitment to further improving customer's online grocery experience and service through continued development of its proprietary technology, "will enable us to continue to grow ahead of the online grocery market, and substantially ahead of the market overall".
He said it remained too early to predict how the new "pricing dynamics" will unfold throughout the year, and stressed that it was dependent on future currency movements.
House broker Numis said while basket declines had previously been part-driven by food price deflation, this is now absent from management's commentary: "We believe this reflects the return of price inflation to the grocery industry, which could benefit Ocado’s revenue, gross margin, and per-basket operating cost ratios."
Steiner attributed the fall in order size to a reduction in multi-buy promotions and further take up of the Ocado "Smart Pass", which drives customers to shop more frequently and increases customer retention, but added that number of orders being picked at the new Andover customer fulfilment centre continued to increase as expected.
Average orders per week grew 16.7% to 252,000 in the quarter, made up of both new and existing customers.
At the period end, Ocado had cash and cash equivalents of £41.2m and debt of £130.2m.
Market reaction
Shares in Ocado had risen 1.6% to 262.3p by 0835 GMT on Tuesday, well down from the 325p in September when it warned margins were being hit.
“Investors might be waiting a long time before Ocado strikes the international deal it’s been promising," said Neil Wilson at ETX Capital, though he felt the Q1 numbers were solid in a tough market.
"How long will investors keep waiting for partnership abroad? At the current pace of sales growth, they may wish to be patient for a while longer."
He added: "But profits remain unlikely to suddenly improve - a puny £14.5m on £1.271bn in revenues last year, without the much-hyped international deal. Current valuations look pricey with Ocado trading at around 130 times earnings before today. If Ocado lacks the muscle to expand on its own, it could become a takeover target itself, especially given the current climate. The likes of Wal-Mart-owned Asda or Amazon could be interested."
House broker Numis said the numbers were solid and in line with its expectations.