Ocado’s first profit in sight as new threats loom

<p>Ocado said sales edged lower and shoppers bought less on average per order, but investors still rewarded the group with a 6.6% share price rise. […]</p>

Ocado said sales edged lower and shoppers bought less on average per order, but investors still rewarded the group with a 6.6% share price rise.

Gross retail sales rose 15% year on year in the 16 weeks to 30th November, the online grocer’s fourth quarter, to £311.4m.

That’s about half a percentage point behind Q3′s rise.

Average order size fell 1.7% to £109.74.

In the quarter before, average order size also fell 1.7%, to £111.64.

Ocado investors are more skittish than the average shareholder, and normally, such negative taints in its earnings tend to knock the shares lower.

Why didn’t that happen today?

Well, one fair guess is that shares rose because the scent of profit is in the air.

 

 

Ocado may book an £11m profit in February

Ocado’s quarterly results today place its first ever annual pre-tax profit within reach.

Just as importantly, its first clear profit would make its first ever clean earnings per share possible (meaning an EPS without ‘adjustments’ that essentially turn it into a loss).

It’s likely the symbolic and future-underpinning benefits of these events are currently being priced into Ocado shares.

I’m cautiously optimistic these wins could happen in Ocado’s current full year (ending in February) with a pre-tax profit of slightly more than £11m. This would enable a clean EPS of about £1.80.

Whilst such modest successes would be welcome, it’s worth keeping an eye on near-term threats, of which there are quite a few.

 

 

Rivals aren’t standing still

We can largely summarise them as intensified online competition and a further evolution of customer shopping preferences being tapped by (for e.g.) Sainsbury’s with its new Click & Collect launch in June.

Sainsbury’s also ramped up online capability in October with a new dedicated ‘fulfilment centre’ in in East London.

Partner and rival Waitrose has not been standing still either.

Its direct access to its own higher-margin lines (which Ocado also sells) is an aspect we think investors will want Ocado to shed more light on and provide reassurances about soon.

And we can’t overlook the good old-fashioned quick-and-dirty aspects of grocery retailing: market leader Tesco, and its close peers, Asda, Sainsbury’s and Morrisons have of course, all cut prices in the battle over market share against discount chains.

Ocado’s efforts on that front have been negligible to date. That though, needs to be balanced against the overall falling sales at its bricks-and-mortar rivals.

 

 

More talk and more action needed

Overall, Ocado has provided welcome signs of stabilization of its operations, cash flow, and revenues and has underpinned potential for a signal first-ever annual profit.

We think there is room for increased aggressiveness by Ocado on margins, mix and retail concepts and these will need to start being communicated next year, if the firm wants to keep shareholders on board.

(Note the 50%+ share price rise since 15th October, even though the stock is still down more than 20% over the year).

Also don’t forget Ocado’s lack of dividend and forward price-to-earnings ratio of 89 times are easy sticks for critics to beat it with.

It’s such sentiments as the ones I outlined above that may be motivating current moves in City Index’s Ocado Group Daily Funded Trade.

 

OCADO HALF HOUR DFT 11TH DEC 2014

 

There are clear signs that momentum is becoming overstretched on a half-hourly basis.

The fact that the last trade before close on Thursday was within (not above) a large engulfment from the hour before may also suggest a pause.

On a monthly view, it becomes apparent that current levels are close to the June 2013 high at 349/50, with such levels acting as potential resistance.

 

OCADO MONTHLY DFT 11TH DEC 2014

 

Current active trading in the region could therefore prove to be important for direction in the medium term at least.

 

 

 

 

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