Ocado’s steady Christmas sales disappoint, shares slip

<p>Ocado shares tumbled at the start of trading on Wednesday even though it announced solid results for the critical Christmas retailing season. The firm said […]</p>

Ocado shares tumbled at the start of trading on Wednesday even though it announced solid results for the critical Christmas retailing season.

The firm said there was little slippage in December gross sales which, at 14.8%, more or less matched the 14.9% growth rate of the last quarter of the online grocer’s financial year that ended in November.

Plus the firm said on its busiest day in the lead up to Christmas, it processed sales that were almost 15% higher than a comparable day in the year before.

The results confirm the view that Ocado remains on track to report its first annual pre-tax profit of c. £11.5m for the year that ended in November (results due 3rd February).

But instead of rising at the open the shares immediately traded almost 3% lower.

There are a number of factors that might explain some tardiness on the stock this morning.

The most obvious is that the shares had already gained about 83% in the last 3 months up until last night’s close, partly due to anticipation of that maiden pre-tax profit. Whilst the stock is still down about 24% on a 52-week basis, common sense investors would very likely hold off for a spell out of natural caution following such gains.

 

Sales growth ticks further below 15%

More importantly, another way of looking at what Ocado’s CEO, Tim Steiner, called a continuation of “the solid growth performance from quarter four into the run up to Christmas”, is that gross retail sales merely stagnated during the period at the same just-below-15% growth seen in previous quarter.

The disappointment might also be enhanced by the expectation that with the widespread promotional activity seen among all retailers in the winter holiday season—which Ocado certainly wasn’t immune to—sales should have been higher.

The fact that they aren’t may warn that one of the deep and unexpected troughs which this volatile company and stock has been prone to since coming to the market, could be around the corner.

We noted in December, when Ocado reported its final quarterly trading,  average order size was, worryingly, trending lower—down 1.7% in that quarter to £109.74, after having also fallen 1.7%, to £111.64, in the quarter prior to that.

Today’s fairly undetailed report does not contain any average order size figures.

Still, Ocado’s price-to-earnings growth lags the average of even its struggling supermarket peers by more than a third, so investors are right to be more than usually sensitive to hints that growth might be facing new disruptions.

 

Skittish

Still, it’s become a market truism that Ocado investors are more skittish than the average—the stock’s beta is about triple the average of a peer group compiled by Thomson Reuters—so today’s stock reaction (or perhaps over-reaction?) may be well in-line.

Not forgetting, Ocado is often the most shorted stock in the entire London Stock Exchange, financial data provider Markit currently ascribes a ‘medium’ level of short-selling activity on the stock—higher than the average.

As for the share price—after gains of 83% in the last three months, largely explainable by the market expecting the firm to finally make a full-year profit, there are strong signs that the shares may be due for a pause.

The shares could eventually see reasonable gains today—why not? There was at least an underlying strength in Ocado’s recent sales—but the stock should still revert back towards near-term lows around 385p fairly soon.

Looking at the indecisive doji forming on the weekly chart, and the percentage price oscillator (blue line) inverting within buying territory, meaning slowing upside momentum, there’s scope for caution.

 

OCADO WEEKLY POST CHRISTMAS TRADING UPDATE

 

I also favour 385 as a near-term support looking at hourly trading of the Ocado Group Daily Funded Trade offered by City Index.

Momentum is showing a clearer switch to reduced buying in this context, looking at Moving Average Convergence Divergence (MACD) and the percentage price oscillator (PPO).

 

OCADO HOURLY DFT POST CHRISTMAS UPDATE

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.