Today’s trading statement from Ocado (LSE: OCDO) shows that the online grocery company is moving from strength to strength. For example, sales for the group increased by a whopping 19.2% in the twelve weeks to 22 February, with average orders per week now standing at 183,000 versus 155,000 in the same period in 2014. Ocado’s shares have been firmer so far today, and are up around 3% at the time of writing.
Growth Potential
Although short on detail, today’s sales figures from Ocado show that the company continues to outperform its larger and more established peers. The reason for that is quite simple — the UK supermarket is undergoing an evolution in which increasing numbers of shoppers are deciding to buy their groceries online. And, since Ocado is a pure-play online operator, it is benefitting more than any of its peers from this shift in shopping habits. Therefore, it is likely that Ocado will continue to post sector-leading sales growth numbers over the medium term.
The Bottom Line
The challenge for Ocado, though, is not in terms of growing its top line. Where it struggles (and is likely to continue to struggle) is with regard to its bottom line. In other words, many of its rivals treat online grocery shopping as something akin to a not-for-profit exercise. In other words, they see the online grocery market as a space they want to be exposed to, but which they are happy to subsidise with the much more lucrative convenience stores (where margins are very appealing) and also, to an extent, their larger stores.
A Diversified Offering
For example, Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) has a significant online presence, but appears to treat it as more of a necessary exercise to keep customers, as opposed to a profitable one. In fact, its online presence could be likened to its petrol stations in terms of offering little in the way of profit but being a key draw to win and keep customers, who will inevitably use Sainsbury’s convenience and larger stores where profit margins are much more impressive.
Looking Ahead
Even though Ocado made its first profit last year, it remains paltry compared to that of Sainsbury’s. For example, while Ocado’s pre-tax profit in 2014 was £7m, Sainsbury’s was £898m. And while Ocado has stunning growth prospects over the next couple of years, its price to earnings (P/E) ratio of 158 seems to more than adequately price these in, while Sainsbury’s P/E ratio of 12 looks far more appealing.
So, while Ocado’s trading statement is positive and its sales are impressive, its bottom line and valuation continue to let it down. As such, Sainsbury’s remains a much better investment for the long term.