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THE Ocado share price has languished in 2021 following exciting times for the company in a locked down 2020 during which the shares flew. Arguably, Ocado is one of only three predominantly technology-based companies in the FTSE 100 – alongside Darktrace and Next.
Ocado is best known for its online grocery operations, which use robot-operated picking and make deliveries direct from the warehouse to the customer. It also licences its technologies through its Solutions arm. In September 2020, Ocado sold half of its grocery business to Marks & Spencer.
The company showed its mettle in 2020 with an impressive performance which made the most of customers being in lockdown. All through the pandemic, Ocado was at pains to say it had seen a permanent shift in shopping habits.
Today’s trading update from Ocado Retail – 50% owned by M&S – tests this thesis. Average orders per week were up 8.5% in the 13 weeks to 28 November compared with the same period in 2020. However, the average basket value fell by 12%, to £118.
These two trends combined led to sales being 4% lower than in 2020. Even so, sales were 32% up on 2019 levels, suggesting there is indeed mileage in Ocado’s permanency claims.
Ocado reports headwinds from rising energy costs and dry ice shortages. However, the company also says labour shortages early in the last quarter have now been resolved, with vacancies having returned to more normal levels1.
A report out earlier this month from ParcelHero suggested online sales in the UK could now be level-pegging with last year, owing to the return of mask wearing and rising caution about contact with other people. Prior to Omicron, online sales had been expected to show a fall of around £3 billion compared with 20202.
The company is pressing ahead with a rapid build-out of more than 56 new customer fulfilment centres across seven markets. However, these come at a substantial cost – a new experience for investors previously attuned to a technology-driven, capital-light business.
Long term growth for the Group as a whole is most likely to be driven by the recruitment of more retail chains through the company’s Solutions arm. Keeping costs low will be the key to combating the international competition such as Norway’s AutoStore, against which Ocado has just won its patent infringement case in the US.
Ocado is currently valued at around 6.6 times the value of its balance sheet assets3. That looks expensive compared with a price-to-book value of around 3 times for the MSCI UK Consumer Staples Index, of which Ocado is a part4.
A direct comparison like this takes no account of Ocado’s now substantial experience in automation or its preeminent global position in end-to-end grocery sales. However, nothing less than new customer wins for Solutions may now be required to justify such a premium rating.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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