Christmas updates: extreme reactions at Ocado and JD Sports

Ocado Retail

Today’s update is a welcome relief for a group which has been subject to severe investment disappointment over recent years, with a share price boost which reflects the sheer strength and success of the grocery arm over the latest quarter.

There are strong signs that Ocado Group (LSE:OCDO) is emerging as the fastest-growing UK grocer, following a focus on its selling prices which is having the desired effect of changing perceptions. The joint venture with Marks & Spencer Group (LSE:MKS) provides the main slug of revenues, and so this update provides a strong base as Ocado attempts to reverse some of the significant damage which the Technology Solutions business has wrought on the group as a whole.

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The figures are undeniably strong to that end, with 17.5% growth in retail revenues during the 13 weeks to 1 December to £715.8 million, total items increasing by 17% to 271.6 million, average orders per week climbing by 16.9% to 476,000 and active customers now totalling 1.12 million following a further 12.1% hike.

This bolsters the numbers for the year as a whole, with similarly strong growth across the piece in the 52 week period, including 13.9% and 12.9% growth in total items and revenues respectively. Record levels of sales over the Christmas period underline the positive trajectory which the retail business is enjoying, which bodes well for overall group numbers.

However, the statement excludes any update on a Solutions business which has tended to be the thorn in the side for the group. Such details will follow when the group reports its full-year results at the end of next month.

In the meantime, a mountain remains in changing investor perception, as partnerships with retailers who use its revolutionary robotic technology have simply not been coming through at a sufficient pace to keep up with the necessary investment thus far. This is an area on which the group is understandably focused, with a previously reported rise in revenues and margins potentially marking something of a turning point.

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Even so, signs of exasperation with the group’s progress have been starkly expressed by a share price performance which saw the group relegated from the FTSE 100 index in June, with the shares now having fallen by 59% over the last year, as compared to a gain of 2.7% for the wider FTSE250. Over a three-year period, the price has cratered by 82% which only begins to underscore the immensity of the challenge which the group faces, even though today could yet mark a line in the sand.

The market consensus of the shares, which obviously considers prospects for the combination of the Retail and Solutions businesses, remains decidedly undecided at a hold as the group attempts to shake off its reputation as a “jam tomorrow” stock.

JD Sports Fashion

JD Sports Fashion (LSE:JD.) chose not to engage in promotional activity in the latest period, deciding instead to protect its cash management and gross margin positions, and this strategy appears to have backfired somewhat.

While revenues grew by 3.4% in the quarter, including an improvement of 1.5% in like-for-like revenues over Christmas, the undesirable outcome is that the group has downgraded its full-year pre-tax profit forecast. From a previous range of between £955 million and £1.035 billion, the revised guidance of between £915 million and £935 million is rather more than the group’s description of the amendment as being “slightly” below forecast.

The remainder of the picture is mixed, with strength in Europe and Asia not sufficient to offset weakness in the UK and North America. For the full year, revenue is expected to grow by around 5% and the gross margin to remain at its 48% level. 

Further out, the most promising and obvious opportunity is JD’s growing brand presence in the major US market. The group recently completed the £900 million acquisition of US retailer Hibbett, which should further propel brand awareness, especially in the southeastern corner of the country.

North American revenues already account for 35% of the group total, and once Hibbett is fully integrated, this is expected to rise to 40%. The £450 million purchase of French retailer Courir has also received the European regulatory green light, although of course the group’s acquisition strategy does not come without risk, particularly at a time when there are questions over the resilience of the consumer on both sides of the pond as evidenced in this update. 

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The downgrade has been met by investors who are currently in a ruthless mood. The double-digit decline in early trade is in addition to a price which has suffered of late, with the shares already having fallen by 16% over the last year prior to this update, a move which compares to a gain of 7.9% for the wider FTSE100.

JD Sports is now taking the tough medicine being handed out by the market and it remains to be seen whether the analyst consensus of the shares as a buy remains intact following this latest disappointment.