Ocado Reiterates Guidance; Solutions Business Progresses Well; Retail Faces Inflationary Headwinds

Ocado Group reported first-half results with group revenue down 4%, driven by Ocado Retail (revenue down 8%, reflecting tough comps and the rising cost of living in the U.K.) that more than offset strong growth coming from the solutions business (U.K. solutions and logistics up 10.7% and international solutions up 120%). Ocado Retail's revenue decline was also a function of smaller average baskets (to GBP 120 from GBP 138 in first-half 2021, a 15% decline), which was only partially recovered by the impact of a 3% increase in average selling prices. On the positive side, active customers grew to 867,000 (up 12%) with the net promoter score for ocado.com outperforming other online grocery sites by 25 percentage points. On solutions, 18 sites including two microsites are now live across six partners and five countries out of the 58 customer fullfillment centers already announced. The firm said despite ongoing challenges in global supply chains all projects have been delivered on time and on budget with partners reporting leading customer satisfaction metrics. On underlying efficiency, units picked per hour, a metric that reflects efficiency within fulfillment centers, improved to 174 from 172 at mature sites, with Andover and Purfleet consistently achieving above 200. Drops per van per week, a metric that reflects last-mile delivery efficiency, has declined to 177 from 183, reflecting a decision taken by the company to maintain surplus vans to mitigate supply uncertainty (deliveries per van per shift improved by 10%). Group EBITDA loss of GBP14 million compares with a profit of GBP 61 million in first-half 2021 and primarily reflects lower scale and high-cost inflation in Ocado Retail (GBP 72 million EBITDA reduction), which was partly offset by the release of management's long-term incentive provisions. The company reiterated 2022 guidance and said it continues to target further solutions deals. We maintain our GBX 1,870 fair value estimate and no moat rating.