Market divided on Ocado valuation

Market divided on Ocado valuation

UK online retailer Ocado is looking to boost its appeal by expanding its range, improving order placement and fulfilment and developing its market positioning.

A spokesperson for the group told just-food today (14 March) the firm aims to broaden its appeal and attract new customers by expanding its product offering.

"Ocado are increasing the number of items they can deliver. The range Ocado offer will increase by 40% this year, on top of a 40% expansion last year," the spokesperson said. "This consists of both grocery and non-food items."

As it looks to build its consumer proposition, the group has also developed its "smart pass" designed to make it easier for shoppers to place orders. Meanwhile, in October Ocado launched a "low price promise" in a bid to improve its price positioning.

The company was able to report this morning that gross sales - up 14.4% - were driven by an increased number of orders in the 12 weeks to 24 February. During the period, the average number of orders processed each week rose 12% to 130,995. Order size also contributed to gains, growing by 2% to GBP118.

In the remainder of the year, it seems likely Ocado's sales will also benefit from increased distribution capacity after the group's second customer fulfilment centre in Dordon, Warwickshire, because fully operational on 24 February.

In a separate announcement to the market, the company also revealed it is in talks with Morrisons, which could see the supermarket group paying for "certain... existing and future intellectual property and operating knowledge". Ocado emphasised negotiations would not impact its relationship with Waitrose and added Morrisons does not intend to acquire either the whole of, or an equity stake in, the business.

Commenting on the result, Numis analysts suggested the "positive start" to the year demonstrated Ocado was able to "drive demand, capacity and leverage".

"We are encouraged that the statement notes 'maintained momentum' in new customer acquisition. If the group can continue this through 2013, we should see this feed into top line expectations over time," the analysts wrote in a note to investors.

The positive news sent Ocado's share price up sharply in morning trade today. By 12.45pm (GMT) shares in the group had gained 22.27%, climbing to 168 pence and placing Ocado's market capitalisation at around GBP1bn.

This compares to full-year pre-tax profits of GBP2m announced in February and has prompted some industry watchers to suggest that the group is overvalued.

"The shares have rebounded strongly after last year's fundraising," Panmure Gordon analysts emphasised, reiterating a sell recommendation. "We think it is possible that Ocado could ultimately be acquired, but we think the price would be well below its current valuation."