“The FTSE 100 started Thursday a touch lower as investors turned their nose up at some mildly positive updates from the likes of Tesco, Marks & Spencer and Persimmon,” says AJ Bell Investment Director Russ Mould.
“The markets had a reminder of inflationary pressures yesterday afternoon as US inflation figures hit a 40-year high.
“This is clouding the outlook for many businesses. For Marks & Spencer it looks like it has been better to travel than arrive, with a really strong run for the shares brought to an end despite strong festive trading.
“The retail sector, so far at least, seems to have done well despite Omicron, although the likes of Marks & Spencer and the supermarkets are potential beneficiaries of the fact that, with Christmas parties cancelled, more of us were entertaining at home and treating ourselves to extras like sparkling wine and posh snacks.
“Despite Marks’ soggy share price, it’s still significant that its clothing and home business, long the ugly duckling of the group, is continuing to spread its wings having delivered growth for the second successive quarter.
“Perhaps there is some disappointment that the company hasn’t served up another big upgrade today – though in fairness full-year guidance had been hiked twice already.”
“Despite a strong Christmas and a small upgrade to forecasts, Tesco didn’t do enough to impress the markets, at least in early trading on Thursday.
“However, there was still plenty to please long-term investors. The more focused strategy progressed under Dave Lewis and his successor Ken Murphy has helped deliver the supermarket’s highest market share in four years.
“Tesco’s online sales continue to track much higher than pre-pandemic levels. This is important as the greater scale in this part of the business is improving its profitability.
“Tesco is also pushing the loyalty angle, funnelling 95% of its promotions through its Clubcard scheme. This means investment in promotions has a double-whammy effect, increasing customers’ attachment to the brand as well as getting them through the doors in the first place.
“For all the buzz around rapid delivery – served by Tesco through its Whoosh brand – the company is prospering by getting the basics of grocery right ensuring that its stores are clean, well presented and easy to navigate and keeping prices keen enough to keep customers on board.
“The challenge posed by the likes of Aldi and Lidl has changed somewhat from when they were complete upstarts; they’re now more mature businesses and therefore somewhat less agile than they were when they turned the sector on its head a few years ago.
“Inflation, as long as it is relatively mild and Tesco can keep tight control on its own costs, isn’t all bad news for the business and, with shopping for food economically insensitive, the company is looking well placed at the start of 2022.”
“For years the market has become accustomed to ASOS delivering high levels of sales growth. Having gone through a tough patch pre-pandemic with warehouse problems in the US, more recently the company has found life harder again thanks to supply chain issues and rising costs.
“A mere 5% sales growth in the last four months of calendar 2021 (in line with guidance) may not seem like a reason to set off celebratory fireworks. Yet it’s gone down well with investors who perhaps feared it wouldn’t even be able to achieve that level, particularly as rival Boohoo delivered nasty profit warning just before Christmas. The challenge now is to achieve stronger growth levels and put the company back on top.
“ASOS is passing on cost inflation to customers which helps to mitigate further margin erosion, having already suffered from shifting slow-moving stock at a discount and incurring extra logistics costs. Fortunately, consumers are getting used to higher costs across multiple industries, and so far, there doesn’t seem to be a large drop-off in demand because of affordability reasons.
“Also benefiting ASOS is the fact that product return rates have normalised. Retailers have been battling a rise in returns which costs them lots of money, and so efforts are being taken in the industry to impose charges on returns to try and discourage customers from sending stuff back, or at least help to recoup the logistics costs.
“There is another bit of key news for the company. Once a posterchild for the AIM Market, ASOS is finally upping sticks and moving its stock listing to London’s Main Market. It means the company should qualify for a place in the FTSE 250 index later this year and benefit from index funds buying its stock.
“AIM has historically been a place for young growth companies. Once they start to become a much bigger business, it is only natural to shift listings to the Main Market which is more the domain of longer-established companies or businesses that have successfully disrupted a market and are now generating decent profits. ASOS certainly fits in the latter category.
“ASOS should have made the move years ago given how it has progressed from being a UK business selling goods mimicking those worn by celebrities on the TV or in films, to now being an international online retailer.”
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