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Can the Ocado share price start rising again?

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It is a disappointing day for investors in Ocado (LSE: OCDO). The FTSE 100 e-grocer’s share price has dropped from yesterday on a weak update it posted earlier today. 

Trading update

A fire at its Erith customer fulfilment centre in July meant that it had to cancel orders and had less capacity to offer slots to new customers. This showed up in a 10.6% revenue decline for its June-August quarter compared to last year. 

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To understand how far the fire is responsible for this decline, it is helpful to estimate the loss because of it. Ocado has provided a number of £35m. After I add the number to the actual revenue for the quarter, it is still less than last year’s figure by 4.5%. This means, that more than half the gap in revenue can be explained by a correction after the easing of restrictions. This is further supported by the fact that even for the six weeks before the fire, Ocado’s revenues were down by 1.8% .  

Why I’m optimistic about Ocado

However, there are three aspects to the update that make me optimistic. First, some of the revenue loss can be explained by a reduction in the average size of the customer basket, which it mentioned in the update, and not the loss of actual customers. This was to be expected, since we are now spending less time indoors and are less dependent on at-home consumption.

Second, it continues to add to its customer base, indicating ongoing expansion of its services. This suggests the potential for the company to bounce back from the latest revenue setback. In fact, it expects to deliver “strong revenue growth in FY22”. 

Third, it says in its update that Marks & Spencer (M&S) products now accounts for 29% of its order basket number. I would have been on the fence about this development at any other time, considering that the retailer has been struggling for a while. Not now, however. M&S recently reported an unexpectedly big increase in revenues and even upgraded its profit guidance for the year. This bodes well for Ocado too.

My takeaway

Despite this, the company’s share price has dropped some 20% in the past year. Some softening was due, going by the scorching growth seen last year. Because Ocado was one of the few FTSE 100 gainers in the lockdown, there was great demand for its stock, driving its price to all-time-highs. But I think a pick-up in its share price is overdue now. 

I reckon that as the latest trading update is absorbed better over time, it could give a fillip to the stock. Also, the risk of another lockdown could make Ocado a good stock to buy. In any case, I think its long-term story is intact, because it caters to the growing online sales industry. Now, of all times, it is a buy for me.

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Manika Premsingh owns shares of Ocado Group. The Motley Fool UK has recommended Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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