Shares in online grocery seller Ocado (OCDO) topped the FTSE 100 with gains of more than 13% to 659p after the company posted an upbeat first half trading statement and confirmed its full year earnings guidance.

The update came as retail consultants Kantar revealed the rise in food prices had eased over the past month and as investors await the latest UK inflation data later this week.

SIGNS OF PROGRESS

The group reported a 9% increase in six month revenue to £1.4 billion with Ocado Retail – its 50/50 joint venture with Marks & Spencer (MKS) – posting a 5% increase in sales to £1.18 billion, the logistics business seeing an increase of 1.7% to £335 million and the technology solutions arm seeing a 59% increase to £198 million.

Investors took heart from the fact the group achieved positive EBITDA (earnings before interest, tax, depreciation and amortisation) of £16.6 million against a loss of £13.6 million in the same period last year, although pre-tax losses swelled from £211 million to £289 million due to a significant increase in depreciation charges and £77 million of ‘exceptional’ costs.

Chief executive Tim Steiner cheered the firm’s ‘good progress’ over the half, with Ocado Retail returning to profit in the second quarter and technology solutions opening the first CFC (customer fulfilment centre) in Japan for the country’s biggest food retailer AEON (8267:TYO).

EXPERT VIEWS

Not everyone was convinced by the results or the statement, however, with Clive Black of Shore Capital – a long-standing bear of Ocado – flagging the rise in pre-tax losses alongside ‘limited progress’ in opening new centres for existing customers Coles (COL:ASX) and Kroger (KR:NYSE).

Black also highlighted Ocado’s move to cut costs, including the closure of its original Hatfield site and the mothballing of new CFCs, which he suggested could signal greater involvement by Marks & Spencer management.

‘We have said it before and we’ll say it again, despite several cash flow seminars, Ocado Group has very low financial visibility which we do not believe to be a virtue when it comes to equity valuation multiples’, said the analyst.

‘Ocado Retail aside, which also has not exactly been a bastion of steady progress and forecasts transparency, there is virtually no basis to credibly model the Solutions activity of the Group where to date so much has been invested for such material accumulated losses, noting considerable capitalisation of costs.’

‘That life isn’t getting any worse for the company is enough to satisfy the market’, suggested AJ Bell head of financial analysis Danni Hewson, ‘although what matters to most investors is whether Ocado remains a takeover target.

‘Rumours that Amazon wanted to buy the business breathed new life into the share price in recent weeks but the retail giant has remained quiet on the speculation.’

GROCERY INFLATION EASING

Another factor supporting Ocado and the wider grocery sector was confirmation from retail consultants Kantar that UK grocery price rises had slowed from their peak.

We may still be a long way from deflation, but in the four weeks to 9 July food price rises slowed to 14.9% against more than 17% over the three months to mid-May.

As head of retail and consumer insight Fraser McKevitt explained, the average annual grocery household bill has jumped by £330 over the past 12 months but the increase would have been £683 or more than double were it not for the change in spending by consumers who have switched to own-brand products, buying items on promotion and making greater use of loyalty cards.

‘It’s clear that shoppers have dramatically changed their behaviour to combat inflation, whether by trading down to cheaper products or visiting different grocers. It also seems the trend towards bigger shops has stuck.  We’re visiting the supermarkets less often than we did before the pandemic and buying more when we’re there.’

In terms of winners and losers, unsurprisingly the discounters Aldi and Lidl continue to take market share, but Tesco (TSCO) and Sainsbury (SBRY) have more or less held their ground, while the big loser appears to be Morrison, which was recently taken private.

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (James Crux) own shares in AJ Bell.

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