The advent of online shopping has arguably been the biggest disruptor for the retail industry for decades. The share of online sales as a percentage of total retail sales has risen by 3.5x in the last 10 years to 18% in 2018, according to the Office for National Statistics. And it will only continue to rise further, given the convenience of e-shopping and the increasing internet connectivity through smartphones and PCs. By 2022, it’s expected to account for 27% of total retail sales, according to research provider eMarketer.
This is good news for disruptor companies like online grocer Ocado (LSE: OCDO), one of few such to make it to the FTSE 100, an index still dominated by old economy companies. Going by the sheer fact that it’s in the right sector at the right time, I think there’s little denying that its prospects look good. But that’s just ticking one box. It’s equally important to assess the company’s performance.
Growing revenues
I like that it’s a well run ship too, even though there is room for it to do better. Its latest numbers showed a 10.5% increase in revenue for the first half of 2019 and despite it continuing to post losses, the update was well received by investors as the share price inched up after the announcement. Unchanged revenue guidance for the full year, with 10%-15% expected growth, is a positive for investors going forward as well, as is the expected improvement in retail profits.
Promising partnership
There are challenges on the horizon, of course, especially as traditional retailers come up to speed and competition rises, albeit in a growing market. In this regard, I like the company’s latest tie-up with Marks and Spencer (LSE: MKS), which could be a win-win in this scenario. That retailer has been struggling for some time while Ocado’s market presence will only be enhanced by the partnership, if all goes well.
The M&S partnership will follow the wrapping up of Ocado’s current deal with Waitrose, which might result in losing customers to Waitrose as it builds up its own online presence. However, there will be some balancing out, as M&S’s food shoppers would now be added to its list. I think there is more reason for optimism here than not, especially as there were reportedly difficulties in running the Waitrose partnership smoothly.
Green shoots
I also like that while retail accounts for the biggest chunk of the company’s revenue, the solutions business, which presently accounts for less than 10%, isn’t to be overlooked either. The segment provides clients with technology for their online business and grew rapidly at over 20%, the latest result update said.
A look at the share price trends reveals that it’s some way off the maximum levels seen in the past one year, making it an opportune time to buy it, I think. For the long-term investor, to my mind, this is a share that shouldn’t be missed.
