Ocado
Online supermarket company Ocado (LSE: OCDO) reported stronger than expected revenue growth in its third quarter trading update. Ocado’s gross retail sales rose 15.3% to £252 million in the 12 weeks to 9 August. Average orders per week grew 16.6% to 190,000, but the average order size slipped 1.1% from £111.64 last year, to £110.46.
Analysts are concerned that competition in the online groceries market could heat up, as supermarkets and retailers seek to offset declining sales from their retail stores. Rumours that Amazon could be looking to launch its Amazon Fresh grocery delivery business in the UK as early as this year have already sent shares in Ocado about a third lower than its peak in July.
Although trading conditions in the retail environment remains tough, the online grocery market shows steady growth, as changing consumer patterns mean an increasing number choose to purchase their groceries online. Aggressive price competition, which has led to the squeezing of the margins of many retailers and food deflation, seems to be beginning to ease.
Even after recent falls in Ocado’s share price, valuations are still extremely pricey. Shares in the company are trading at 152 times its 2015 expected earnings, despite analysts expecting Ocado’s underlying EPS will grow 34% to 1.7 pence this year.
Kingfisher
The strengthening in the Pound in recent months against the Euro and many European currencies caused Kingfisher’s (LSE: KGF) adjusted pre-tax profits to fall 2.3% in the six months to 1 August. In sterling, adjusted sales declined 4.0% in the company’s first half, but on a constant currency basis, sales actually grew 3.5%.
Longer term fundamentals are in Kingfisher’s favour. With a strengthening UK and European economy and historic underinvestment in the existing housing stock, there is substantial potential for growth in the home improvements market. Its management is also seeking to lower costs, by sharing infrastructure across its European businesses and standardising its processes. It is closing some of its unprofitable multi-format stores and focusing on the expansion of its more profitable Screwfix franchise.
Shares in Kingfisher trade at 16.7 times its expected 2015 earnings, as analysts expect underlying EPS will rise 4% to 21.8 pence this year. For 2016, analysts expect Kingfisher’s underlying EPS growth would accelerate to 9%, and shares in Kingfisher would trade at 15.4 times its expected 2016 earnings.
Marks and Spencer
Marks and Spencer (LSE: MKS) has struggled to boost sales outside of its food business. A recent restructuring of its general merchandise business had initially shown signs of success, with like-for-like general merchandise sales growing 0.7% in the three months leading up to 28 March. But in its latest quarter, like-for-like sales slipped back into negative territory, declining by 0.4%.
However, investors need to be more patient with the company’s ongoing restructuring of general merchandise business. As the company focuses on widening its general merchandise margins, some decline in like-for-like sales is expected, and the fall in like-for-like sales was less than many analysts had anticipated.
Analysts expect underlying EPS at Marks and Spencer would grow 6% in 2015/6 to 35.0 pence, and 9% in 2016/7 to 28.3 pence, which implies its shares trade at just 14.4 and 13.2 times its expected 2015/6 and 2016/7 earnings.
Conclusion
Although recent revenue trends show Ocado is doing much better than Kingfisher and Marks and Spencer, ongoing restructuring plans at Kingfisher and Marks and Spencer and strong underlying fundamentals mean their prospects could turnaround soon. On top of this, forward looking earnings valuations for Kingfisher and Marks and Spencer are far more attractive.
