Stock Watch: Ocado, ASOS, Ted Baker, Kingfisher & Next

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Retail is back on the calendar in the week ahead, when we get trading updates and full-year results from a number of high street names and major online players.

Ahead of Ocado Group’s (OCDO) trading update on Tuesday, broker RBC Capital Markets has put a new price target of £10 on Ocado’s shares. The broker raised its target from 750p and reiterated its sector performer investment rating after it was formally announced that Marks and Spencer was to pay up to £750 million to take a 50% stake in a new retailing joint venture between the two companies.

It’s a curious figure to set as its price target though, because Ocado’s shares have already passed the £10 mark. They immediately jumped to £10.23 when the deal was confirmed, before settling that day at £10.19. And they’ve since climbed higher still, to £10.67.

There’s been a lot of twittering about the M&S tie-up resulting in the loss of Waitrose branded goods being a negative not a positive, but time will tell.

Investors will no doubt want an update on the fire that ravaged Ocado’s main warehouse, which accounts for around 10% of Ocado’s orders. The company said it would result in a “reduction in sales growth” but quickly added that it had comprehensive insurance in place for the property, stock and equipment on site, and for business interruption losses.

Ocado is of course, also more than simply an online grocer. That’s only part of the business and the M&S tie-up and even the warehouse blaze are likely to be of limited importance to those who see true value in Ocado as primarily a technology company.

Talking of online retail, we’re also due to get a trading update on Tuesday from ASOS (ASC), which like Ocado has shown the ability to send shockwaves through the market, thanks to unforeseen events. I’m of course thinking of the surprise profit warning it issued at the tail-end of 2018.

Since then analysts at Merrill Lynch have raised the spectre of copycat retailers that it says could prove tough competition for the likes of ASOS and other purely online retailers.

It named a dozen small brands that already compete directly with ASOS and Boohoo in the UK, and argued that investors had underestimated the drag on margins from market fragmentation and “unavoidable” promotions.

Merrill Lynch also downgraded ASOS to “underperform” and set its price target at £24, saying the stock was: “priced for perfection, but we now see margin recovery as increasingly unlikely”.

It’s forecasting that the online retailer’s margins will weaken by 2½ percentage points over the next three years and said it expects the company to reset targets for its US division - due to more onerous import tariffs - a higher reliance on third-party labels than in Europe and potential price cuts to compensate consumers for sales taxes.

At an 80% premium to its peers, ASOS’s valuation “looks inflated”, it said.

While the US market is a potential cause for concern for ASOS, fears over its French business are hanging over DIY retailer Kingfisher (KGF).

It’s due to report full-year results on Wednesday and to date soft markets in France and the UK haven’t helped the group, which owns the B&Q and Wickes brands here.

But despite acknowledging the problems on the French side and mooting a possible sale, the Castorama chain, Kingfisher’s biggest French business, continues to be a drag. It is persistently under-performing the overall French market and Kingfisher’s shares, as a result, are now more than 30% down on where they were a year ago.

The company, which is focused on its ONE Kingfisher transformation program, has announced that it will leave Russia, Spain & Portugal to focus on markets where it has, or believes it can reach a 'market leading position.'

There’s no doubt that turning a business around is tough at the best of times and in a struggling retail environment it’s even more difficult. And French chief executive Véronique Laury seems, frankly, loathe to give up on her home country. But she may not have a choice. Especially if she’s no longer at the helm. Investment bank Stifel has called on the board to take action over the management; saying investors have lost faith in Laury and her £500 million profit target is unachievable.

Credit Suisse remains at outperform but has cut its price target to 280p, while Goldman Sachs has downgraded its rating from buy to neutral and cut its price target to 260p.

It seems Ted Baker (TED) chief executive Ray Kelvin wasn’t given much choice but to resign from the fashion chain he founded more than 30 years ago, after allegations of inappropriate behaviour, including an awkward hugging policy imposed on employees.

Acting chief executive Lindsay Page, who stepped in in December when Mr Kelvin took a “leave of absence” will continue in his role, supported by executive chairman David Bernstein, who will stay in the post until November 2020.

The erstwhile CEO still owns 35% of the FTSE 250 group’s shares and has said he would “support Lindsay in his leadership and be available to him and the team wherever I can offer helpful advice.”

The company has already warned that annual profits will be hit by a series of unexpected costs, including an inventory write-down. Whether the change of leadership spells boom or bust for the fashion chain remains to be seen, but we may get a flavour of what’s possible when we get those full-year results on Thursday.

Also keep an eye out for full year results from Next (NXT) on Thursday. At the start of this year the fashion chain lowered its full-year profit guidance slightly.

Looking forward to the full year, it said it expected full-price sales growth of 3.2%, which was in line with the guidance given in September.

However, it slightly reduced its full-year profit from the previous guidance, downgrading it to £723 million, 0.6% below the previous level. The difference was due to higher sales on seasonal products cutting into margins and increased operational costs associated with the higher-than-expected online sales.

However, it caveated all that with the most uncertain of responses to the ongoing political uncertainty; saying it hadn’t factored into sales estimates the potential benefits of a smooth transition or the downsides of a disorderly Brexit. Read into that what you will.

Brokers’ views are mixed. Credit Suisse has downgraded its investment rating to underperform and cut its price target from £58 to £48. On the other hand HSBC rates the shares a buy but has also cut its price target - to £59. While Berenberg has revised its rating upwards from sell to hold and raised its price target to £41.

Five year performance

(%)

As at 13 Mar

2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Ocado -22.7 -33.4 0.2 131.2 79.9

Past performance is not a reliable indicator of future returns

Source: FE, as at 13.3.19, in local currency terms with income reinvested

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