Can Next and Ocado shares continue to outperform the FTSE 100?

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Can Next and Ocado shares continue to outperform the FTSE 100?
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FTSE 100 retailers Next (LON: NXT) and Ocado (LON: OCDO) have delivered strong share-price performances since the 2020 stock-market crash. Their shares have risen by 134% and 87% respectively since March 2020, compared with a 38% gain for the index.

Their online exposure has been an obvious catalyst during the pandemic, with recent updates highlighting strong sales growth as shoppers have shifted to digital channels in response to lockdown measures.

Although their shares have risen strongly, they could deliver further FTSE 100 outperformance over the long run due to appealing growth strategies, the release of pent-up UK consumer demand and a continued shift to online retail.

Next

Next’s share price has responded favourably to the company’s upbeat financial performance over recent months. Indeed, the firm’s latest trading update for the second quarter to 17 July showed a rise in sales of 18.6% compared with the same period two years ago.

Notably, the firm’s online sales increased by 44% as UK shoppers switched from in-store to digital sales channels. However, even Next’s store sales showed a dramatic improvement during the period. They were down just 6% in comparison with where they were two years ago.

This suggests that the company is benefiting from the widely anticipated release of pent-up UK consumer demand following record savings levels amassed during lockdown. This is expected to continue over the short run, with the firm increasing its sales guidance from a 3% rise to a 6% increase in the current year. It also expects to pay another special dividend in January following the 110p per share payment earlier this month.

Next’s shares currently trade on a forward price-earnings ratio of 16.3. While this may be relatively high, the firm is forecast to post a rise in earnings per share of 12% in the next financial year. This suggests it is well-placed to capitalise on improving UK consumer confidence and the ongoing release of savings.

Ocado

Ocado has also reported strong sales growth in recent months. Its half-year results showed a 21% rise in sales, with its UK retail operations experiencing a 20% increase in revenue as ongoing Covid-19 containment measures boosted its financial performance.

Clearly, the company’s status as a pure-play online operator has been beneficial during the pandemic. Lockdown measures have encouraged many consumers who would normally shop in-store to instead buy products online.

It would be unsurprising for this trend to moderate, as the trend towards online retailing has been well-established over recent years. Furthermore, 43% of UK consumers believe they will continue grocery shopping online at the same level as today once the pandemic has ended.

Of course, Ocado has gradually transitioned to being an international business. Its partnerships with major retailers in countries such as the US and Australia provide growth opportunities, as well as diversifying its business away from the UK.

Despite this, profitability remains elusive. Indeed, Ocado is forecast to deliver a post-tax loss in the current year and in the next two financial years. While this could ultimately hold back its share-price prospects, the long-term growth opportunities presented by the online retail industry may enhance its investment prospects in the meantime.


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