Robert Stephens, CFA, discusses the outlook for online retailers Ocado and ASOS as the economy looks to reopen.
Online retailers Ocado (LON:OCDO) and ASOS (LON:ASC) have enjoyed a sales boom as a result of the Covid-19 pandemic. Consumers have embraced digital shopping avenues, which has resulted in improving financial performances for both businesses.
However, with pandemic-related restrictions due to gradually come to an end over the coming months, could both companies now experience a fall in sales growth? As such, are there challenges ahead for them from an investment perspective?
The prospects for online retailers
In the short run, it would be unsurprising for many shoppers to revert back to their pre-pandemic spending habits. The novelty of buying groceries and clothing in stores, as opposed to online, may act as a moderate drag on the sales prospects for online retailers such as ASOS and Ocado. Furthermore, consumers may return to spending a larger proportion of their disposable incomes on leisure activities that have been unavailable in recent months.
However, the long-term outlook for online retailers still appears to be positive. The pandemic has not been the cause of a shift in sales from bricks-and-mortar to digital avenues. Indeed, between 2009 and 2019 the proportion of total retail sales conducted online increased from 7% to 21%. Certainly, lockdown measures have accelerated this trend, with the proportion now standing at 31%. However, the convenience and value that online shopping can offer may mean that the established long-term trends within the retail sector persist post-coronavirus.
Ocado and ASOS appear to have sound long-term growth strategies to capitalise on digital growth trends.
ASOS is pursuing a well-worn strategy of acquiring strong retail brands, such as Topshop and Miss Selfridge, from administrators. This provides it with the opportunity to earn greater margins from selling a higher proportion of own brands. This should also help it to more easily differentiate its offering from those of sector peers to improve its competitive advantage.
Ocado continues to offer more than just exposure to the UK online grocery market. Its partnerships with retailers in a wide range of territories means that it has a diverse range of growth opportunities in markets that may be less developed than the UK in terms of their online penetration. Since many of them are due to ramp-up their operations over the next few years, it could deliver a sustained rise in sales.
Given the level of interest in growth stocks at the present time, it is perhaps unsurprising that ASOS and Ocado have rich valuations. For example, Ocado is currently unprofitable and has a price-to-sales ratio of 6.5. This compares to sector peer Sainsbury’s price-to-sales ratio of 0.2. Meanwhile, ASOS has a forward price-to-earnings ratio of 37. This is significantly higher than sector peer Next’s forward rating of 17.
Despite their premium valuations, Ocado and ASOS could offer long-term share price growth. In an increasingly online-focused retail environment, they could offer substantially greater sales and profit growth than their peers. Their international diversity and growth strategies may further enhance their investment appeal – even if a short-term reversion of consumer spending towards bricks-and-mortar retailers takes place as lockdown measures are eased.