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TESCO VS. OCADO, no contest...

Updated: Oct 31, 2023

Tim Steiner had a lot to say on Tuesday outside the $2.7trn market opportunity, a figure so

big arguably only Fed QE programme compares... he was attacking potential government tax policy, the digital tax, as well as rumoured capital gains tax increases (note if proposals are implemented, he may be forced into selling his shares ahead of it).

Those wondering why he was also emphasizing entrepreneurial tax relief to holdings under 6% should note his c.GBP600m stake in Ocado is a c.3% holding. Anyway Nutstuff comments here on the results...Ocado Retail grew by +35% revenue to GBP2.4bn. This was healthy although a lot slower than the online market which nearly doubled... Tesco Online is now 3x the size. Customers fell by 15% to 680,000 but the 30% growth in basket size more than made up. Ocado’s relatively sluggish sales was a function of limited capacity, especially following the Andover fire.

Barron’s article on inflexibility of the Ocado model is well made. EBITDA grew by 266% to GBP148.5m at Ocado Retail (M&S JV) with EBITDA margin rising from 2.5% to 6.8%. This is a function of full utilization, likely favourable mix and the jump in average basket size. If you are delivering 30% more sales (basket size) through same infrastructure (warehouses and delivery slots) at c.20-25% gross margin you should add c.650bp of margin (and vice versa).

Note the second half margin was just under 9%. While Group EBITDA was GBP73m, underlying was zero if you split out the M&S 50% share of Ocado Retail, ie GBP74m, which it fully consolidates. Headline pre-tax loss was GBP44m but again split out M&S share of Ocado Retail and it was nearer GBP100m. The company has c.GBP700m of net cash at year end (GBP1bn of debt, GBP400m of leases and GBP2.1bn of cash GBP).

Looking ahead:

Ocado and Steiner has declined to give guidance on Ocado Retail despite them emphasizing online food retail has changed for “good” while the ramp in solutions is slow, capital intensive, untransparent (utilization questions and interestingly CFC sizes are getting smaller and smaller).

The reason apparently is that the outlook depends on Covid. Numis has cut its 2021 EBITDA to $60m (consensus GBP80m), ie zero again if take out M&S share. The possible reason for the hesitancy...if basket size falls back to normal (still a very healthy GBP110), Ocado Retail margins should go back to 2% and if Ocado can’t utilize its substantial new capacity coming online later this year it could even go negative.

On cashflow, Ocado has guided to a further GBP700m of capex which on top of GBP300m of recent acquisitions should mean that the company will burn through GBP1bn this year and will end up in a net debt figure of c.GBP300m.

Nutstuff is happy to have Tesco in its portfolio (UK’s Walmart at 11x) but reiterating my avoid

on Ocado given all its indicators... themes (like AMZN, its a lockdown stock), valuation,

balance sheet (net debt beckons), business quality and tail risk (Autostore litigation) scale and sourcing is what matters in Food retail, which is why Amazon struggles with Wholefoods and Walmart remains formidable.

Offline will remain 80% plus over next few years, while all players will employ technology. Ocado’s solutions are neat and best in class, but are likely to worth only a 100bp or so at best, a secondary factor. This means Ocado UK will struggle with profitability post-covid and while Ocado international may win customers pricing power will be limited an capital commitments substantial... Autostore (its legal adversary) makes only a $100m EBITDA

despite having 150 plus installations a year v Ocados single figure.

A comparison below of Ocado and Tesco for 2021 ..., Ocado will have the larger market cap

(20.5bn v 18.5bn) although Tesco will have a larger EV (29bn v 21bn). Tesco has better asset

backing at 24bn (80% of EV) v Ocado (5% of EV). Tesco wins on online sales in UK are

c.GBP8bn v Ocado c.GBP2.7bn and again on total sales GBP50bn v c.GBP3bn. Tesco

generates c.GBP3.5bn EBITDA v Ocado’s zero; on cashflow, Tesco should generate

c.GBP1.6bn (9% FCF yield) v Ocado’s $1bn cash burn.


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