Ocado Retail cuts outlook: Where next for the Ocado share price?

Josh Warner
By :  ,  Market Analyst

Ocado Retail sales return to growth

Ocado Retail, the 50:50 online grocery joint venture between Ocado and Marks & Spencer Group, revealed this morning that sales returned to growth in the third quarter after rising 2.7%, mostly thanks to weaker comparatives from last year, and the company expects this to accelerate in the fourth.

Sales growth was aided by record customer numbers as it continues to poach them from rival services and attract those trying out online grocery shopping for the first time. A step-up in marketing has helped entice new customers to the platform. It reported 946,000 active customers in the period, up 23% from the year before and this continues to rise at a record rate.

This is all the more important as fresh capacity comes online. It handled an average of 374,000 orders per week in the quarter but said it still has capacity to add 200,000 orders per week which, until utilised, will weigh on profitability.

 

Ocado Retail downgrades its outlook for 2022

However, Ocado Retail downgraded its outlook for 2022 as shoppers struggle to cope with the cost-of-living crisis, prompting them to buy fewer items and trade-down to cheaper goods as they are forced to stretch their pay packets further. Average selling prices were up around 5% from last year, and the pullback in spending resulted in the value of an average basket dropping 6% in the quarter.

Ocado Retail is adapting to changing consumer habits. The M&S own-label range remains popular and makes up around 30% of the goods in the average basket, while Ocado has also been growing its own-label range after adding 75 new lower-priced goods in the period. Both ranges aim to supply anchor products that people buy the most often at prices in-line or below what is on offer at its competitors.

Annual sales will now be lower than last year as the improvement in the second half fails to offset the tough numbers seen in the first, while Ebitda will be ‘close to break-even’ as the company grapples with higher costs, particularly for the likes of energy and the dry ice it uses to transport items to customer’s doors.

Electricity is costing around three-times as much as last year and fuel costs are about 15% higher which, together, will add £20 million to £25 million in costs over the full year. Meanwhile, the surge in energy costs has also caused dry ice prices to soar, which could add another £15 million to £20 million in annual costs this year unless Ocado can find a cheaper alternative.

Ocado Retail was previously aiming to deliver low single-digit sales growth and a low single-digit Ebitda margin in 2022.

‘In the medium term, Ocado is confident, in the light of strong customer acquisition and continued improvements to underlying productivity, that sales and Ebitda margin will recover strongly. This will be driven by growing customer numbers, orders, ongoing cost discipline and as we fill the available capacity. These dynamics underpin a recovery to high-mid single digit Ebitda margins in the mid-term,’ the company said this morning.

 

Where next for the Ocado share price?

The Ocado share price is down heavily in early trade this morning, derailing the rally since the stock rebounded from its lowest level since mid-2018 a week ago.

That pressure means the three-year low of 670p is now back in play. We could see the previous multi-year low of 703.8p hit back in May emerge as a level of support in the meantime. Importantly, these levels need to hold to avoid opening the door to a much bigger potential drop toward 603p.

On the upside, any renewed momentum will allow it to capture the three-week high of 798.8p hit yesterday, which is also in-line with the level of resistance seen throughout July. From there, it can target the 50-day and 100-day moving averages before bringing the 877.8p level of resistance seen in June into the crosshairs. The 953.8p ceiling hit in both June and August should be treated as a key upside target going forward. The 22 brokers that cover Ocado see even greater upside potential over the next 12 months with an average target price of 1,113.9p.

The Ocado share price has plunged after its grocery arm cut its outlook

 

Where next for the Marks & Spencer share price?

Marks & Spencer shares are also trading lower today and following a downtrend that can be traced back to early August.

Investors will want to see 119p hold as a floor to avoid bringing 115.3p – its lowest level since November 2020 – back into play. A break below this two-year low could open the door to 104.5p, which acted as a level of both resistance and support during 2020.

If the stock can gain ground and break above the downtrend then 130p comes back onto the radar before it can target the 50-day and 100-day moving averages. Once recaptured, shares can look to climb back toward the 148p level of resistance seen in June and July. The 23 brokers that cover the stock see much greater upside potential over the next 12 months with an average target price of 172.67p, a level not seen since last March.

The Marks & Spencer share price has fallen after its grocery JV cut its outlook

 

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