Tesco drives a hard bargain while Asos and Boohoo bounce back as investors await end to chaotic five days

“The sun is shining bright, the weekend is here, yet all investors can think about is medicine to calm the motion sickness after one of the most chaotic five days for stocks and shares in a long time,” says Russ Mould, Investment Director at AJ Bell.

“Rising inflation, rising interest rates and a rising chance of a recession have all served to turn stomachs in equity-land. While parts of Europe managed to regain focus on Friday, with a 0.3% gain from Germany’s Dax index, and pre-market indicative prices pointed to a slightly better session in the US, the FTSE 100 was still feeling groggy.

“Dipping slightly on Friday at the market open and then trying to get back on its feet, the FTSE 100 is on track to end the week nearly 4% lower. The S&P and Nasdaq in the US are looking at circa 6% losses for the five-day session.

“Year-to-date that means the FTSE 100 has fallen approximately 6%, the S&P down 24%, and the Nasdaq 33% lower. This is a shock to the system for many investors who are relatively new to the game and haven’t seen a proper market correction before.

“Media group Future pleasantly surprised the market by saying everything was going well with trading, triggering a big jump in the share price. The stock had previously been weak as investors feared its business model - making commission from product sales that originated from its online content - would suffer if consumers were cutting back on spending.

“Investor confidence can’t have been completely shattered, however, judging by the fact some people were happy to go shopping for bargains after the recent sell-off. ASOS bounced back nearly 5% after yesterday’s slump, while Boohoo also moved 2.6% higher.

“These buyers must clearly be taking the view that the shares have been oversold and the new chief executive of ASOS has done the classic kitchen sink job - dishing out all the bad news and resetting expectations so the story turns to recovery from day one of their tenure.”

Tesco

“In relative terms Tesco is in a decent place. The supermarket is the market leader and its scale enables it to drive a hard bargain with suppliers to help protect its margins against mounting inflation without putting up prices too much for shoppers.

“However, Tesco is far from immune to the challenges facing all consumer-facing businesses and that is evident in its latest update.

“Overall sales figures enjoyed a positive contribution from inflation, but volumes seem to be falling as habits start to shift in the face of challenged household budgets.

“The cost of living crisis is largely out of Tesco’s hands and when it comes to the things it can control it is doing well.

“The Aldi Price Match and Low Everyday Prices initiative is helping to hold off the challenge of the German discounter and by offering lower prices on lots of products exclusively to Clubcard members it is helping foster loyalty among its customer base.

“This is reflected in market share gains for Tesco – with the proposition looking less vulnerable to the threat posed by Aldi and Lidl than the likes of Morrisons, Sainsbury’s and Asda.

“To a large extent Tesco is not overly exposed to discretionary spend pressures, bar elements of its wholesaling Booker business and its clothing and general merchandise lines. People might try and economise on their grocery shop, but ultimately they will still need to buy food and toiletries.

“Tesco has been well-run since ‘Drastic’ Dave Lewis took over when the company was at a low ebb in 2014 and that appears to be continuing under his successor Ken Murphy.

“The business has been streamlined, issues like the pension scheme have been sorted out and its debt has been refinanced. This means a good portion of the cash the company generates can be handed back to shareholders through dividends and share buybacks.

“One potential concern is the drop in online sales. The rapid adoption of a web-based weekly shop during the pandemic looked to be transforming the economics of grocery delivery, the commerciality of which had long been in question. With fuel prices soaring and orders down, that might now be under threat again.”

These articles are for information purposes only and are not a personal recommendation or advice.