Outlook downgrade clobbers Ocado (OCDO Stock) share price

Earlier this month the Ocado share price hit its lowest level in 4 years on pessimism that management would be able to paint a narrative that involves the prospect of turning a profit, as it battled the multiple challenges of rising costs of raw materials, energy, and product.

A few months ago, as a result of these challenges Ocado said it would have to raise prices in order to compensate for these increased overheads, as it looks to maintain its margins, however with consumer wallets being so squeezed it’s not immediately obvious that this will offset the higher costs of doing business.

These doubts were confirmed this morning after Ocado reported a 2.7% rise in Q3 sales but said that Q4 sales were likely to be affected by energy cost headwinds, which would in due course weigh on profitability, sending the shares sharply lower and back towards the lows of earlier this month.

Customer numbers were up 23% to 946k, while retail revenue came in at £531.5m. The number of average orders per week rose by 10.7% to 374k.

Average basket sizes however were lower, down 6% from £123 to £116, as customers traded down to cheaper items. 

Ocado’s joint venture with Marks & Spencer is now expected to see a small sales decline over the full year 2022, with core earnings set to come in at about break-even. This decline has also impacted M&S share price, which has also slipped back in early trade. 

Despite these challenges the business is adding extra capacity, with the Bicester fulfilment centre now fully open, adding 30k orders a week at maximum capacity.

Canning Town is also increasing its output with a new site in Leyton also opening earlier this month.

Today’s downgrade in the Q4 outlook shouldn’t have come as too much of a surprise given the warnings of management earlier this year, however the reality that the company could struggle to break-even on EBITDA hasn’t been received well.

That said we haven’t fallen below the lows this month, and with the shares already the worst performers on the FTSE100 this year, it could be argued that a lot of the bad news could already be in the price.