Ocado sales rise overshadowed by fears over increasing costs

The online supermarket sees earning hit by cost of new distribution centres

Ocado is set to open a new distribution centre in Dartford next year (Reuters)

Online supermarket Ocado has cheered another strong quarter as it reported a pick-up in sales growth, but signalled a further hit from expansion plans.

The group posted a 13.1 per cent rise in retail revenues to £312.7m for its third quarter to August 27, up from 12.5 per cent in the first half of its financial year.

Including earnings from its tie-up with Morrisons, group revenues lifted by 14.3 per cent to £344.5m.

But shares in Ocado fell 7 per cent as the group signalled another knock to earnings from costs of setting up new distribution centres.

It is increasing the capacity at its new centre in Andover, while also working on its fourth and biggest centre in Erith, Dartford, which is set to open next year.

Tim Steiner, chief executive at Ocado, said: "While increasing some costs in the short term, this will allow us to meet the rapidly growing demand for our services from UK consumers while allowing us to offer the very latest technology to current and future customers of our Ocado Smart Platform."

In July, it posted an 18.1 per cent fall in half-year profits to £7.7m, with the drop largely as a result of the costs of opening its new distribution centre in Andover.

Ocado's update came as industry supermarket share figures from Kantar Worldpanel were also released on Tuesday showing that Ocado is now reaching more shoppers nationwide than ever before, with 834,000 households shopping with the retailer in the 12 weeks to September 10.

Kantar said Ocado now has a 1.4 per cent share of the market, up from 1.3 per cent a year earlier, while it said the retailer's sales grew by 10.1 per cent in the latest quarter.

The group notched up a 16 per cent rise in average orders a week to 254,000, although it said the average basket size fell by 1.2 per cent to £106.25, but this was an improvement on the 1.4 per cent fall seen at the half-year stage.

It has previously said that customers are buying fewer items, preferring to shop more frequently.

Retail analysts at Bernstein said earnings expectations would need to be trimmed for Ocado, given the guidance on costs of the new depots.

They said: "The market under-estimates the margin impact of setting up the new facilities.

"In our view, profit expectations for 2018 and beyond will need to come down further."

Neil Wilson, senior market analyst at ETX Capital, added that while the sales growth was "pleasing", "no further news of tie-ups will leave investors a touch disappointed".

FTSE 250-listed Ocado announced a long-awaited international partnership in early June, although it said the customer wanted to remain anonymous.

It had been under pressure over its delay in striking a deal, missing a self-imposed deadline of the end of 2015 to expand overseas.

PA