FTSE still short of record high as Chinese growth slows, Ocado hit by shrinking basket sizes and THG in the doghouse again

“The FTSE 100 fell just short of its record highest close on Monday night and was treading water on Tuesday after Chinese fourth quarter growth figures showed the impact Covid had on the world’s second largest economy,” says AJ Bell Investment Director Russ Mould.

“China has particular influence over the FTSE 100 thanks to a heavy weighting for commodity stocks of which the country is a rapacious consumer. Rio Tinto’s latest update saw the miner warn of potential supply chain issues and labour shortages in China.

“This runs counter to the narrative that a reopening of the Chinese economy would help to improve the flow of goods in and out of the country and reduce disruption, but Rio’s warning suggests that in the short-term surging Covid cases will bring their own difficulties.

“China’s 2022 growth may have been no worse than expected but it was still the slowest pace since the mid-1970s as Covid restrictions took their toll – and that’s before you factor in the suspicion in some quarters that China doesn’t always paint the full picture with its official data.”

Ocado

“A 2023 recovery in the shares of online groceries firm Ocado was snuffed out after the company reported sales growth which was dwarfed by inflation and by the performance of traditional supermarkets and offered an uninspiring forecast for the rest of the year.

“While Ocado is winning new customers, people are buying less. This has an outsized impact on online deliveries which cost roughly the same to make whether the order is two potatoes and a block of cheese or a full weekly shop.

“Even with tiered charging based on how much you order, shrinking basket sizes are still likely to have a material impact on margins. Ocado is also at a premium price point which isn’t exactly aligned to the pressures on household budgets in the UK.

“Pointing to a strong rebound in 2024 requires investors to take a lot on trust and it doesn’t look like the market is willing to extend Ocado this courtesy.

“It doesn’t help that the long-term growth story at Ocado isn’t exactly capturing the imagination either. While there has been a trickle of new licensing deals for its Ocado Smart Platform, an out-of-the-box online groceries solution for global groceries firms, there hasn’t been the flood of agreements that might have been hoped for in the wake of the pandemic.”

THG

“THG has once again failed to deliver the goods. In an environment where plenty of retailers are saying that trading has either held up well or self-help measures are helping to drive a recovery in earnings, THG bucks the trend by issuing a profit warning.

“The once hyped e-commerce player has suffered from a sharp slowdown in sales growth, higher raw material prices, transport disruption and contract timing issues. Sales growth has gone from 35.1% in 2021 to 4.1% in 2022, with the OnDemand division almost griding to a halt after being one of the strongest parts of the business a year earlier.

“Just as many bricks and mortar retailers have been forced to review their business and focus on what they do best rather than continuously try to expand, online players are also doing the same.

“We’ve seen a period of rapid sales growth for online entities, but times are changing. At the end of the day, it’s all about profit and cash flow, and if anything is acting as an impediment then it must change or go.

“If the stock market doesn’t buy into THG’s realignment efforts that raises the chances of founder and CEO Matt Moulding finding someone to help him take the business private.”

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