Market Analysis: Ocado, Redrow, Inditex, The Restaurant Group

Ross Hindle, retail sector Analyst at Third Bridge comments onOcado's 3Q trading update: "Ocado’s Group Q3 retail revenues were down 10.6% y/y, however average orders remain robust at 338,000 per a week."

"Ocado is retaining customer loyalty but it seems many people are simply spending less on food now they are out of the house more and commuting more regularly."

"Ocado is also facing a squeeze. The big four grocers are gaining ground on home delivery whilst a new breed of on-demand food delivery start-ups also nibble at market share. Ocado is now aiming to increase capacity to 700,000 deliveries per week by 2022 as it looks to cement its place as the go-to online retailer."

"Labour constraints remain a key risk highlighted by management. Labour constraints have plagued companies like Ocado since the start of 2021 and only worsened. There have also been food shortages as farmers and processors struggle with the same issues. Our experts say the picture may deteriorate further into Christmas."

"The M&S partnership continues to be a shining light for Ocado, with M&S products representing c.29%of the basket. While this expansion is impressive it is also margin dilutive. Ocado sells the majority of its own-label products, for which it makes a much higher margin relative to M&S goods. The experts we are speaking to believe the sweet spot for M&S products is around 25% of the Ocado basket, a point at which M&S products can still attract new customers but Ocado's bottom line remains intact."

Ben Nuttall, Senior Analyst at Third Bridge looks at Redrow: "Full-year 2021 revenue came in in line with expectations 45% above 2020, but still lagging 2019 by 8%. Legal completions increased 39% still 13% below 2019 but again in line with expectations. This performance is largely thanks to Redrow overcoming its market challenges by securing building materials through long-term supplier relationships and house price inflation more than offsetting cost increases."

"Making planning easier was on Boris’s agenda, but the specialists we are speaking to see the unexpected loss of the Amersham by-election pumping the brakes on any changes. This could see a tough planning, price supportive environment remaining."

"Lloyds and other institutional investors entering into the market with plans to buy 50k houses for buy-to-let shows signs the UK rental market could be further professionalised, leading to more demand supporting market pricing."

"Redrow could be an interesting target for acquisition, however, consolidation of the market looks challenging."

For Inditex, Barnick, Senior Analyst at Third Bridge says:
"Inditex is emerging as an early winner in the post-Covid retail world, with sales recovering by 7% in Q2 vs 2019.

"Zara continues to be the shining star of Inditex's brand portfolio. Zara has emerged as a fashion leader, creating rather than simply following trends. Combined with an agile supply chain and quick lead times, Zara is now at the front of today's fashion scene and can realise trends quickly and effectively.

"Gross margins continue to be resilient due to reduced discounting. Inditex has benefited from relatively modest stock levels as it successfully cancelled orders with suppliers to avoid heavy discounting during end of season sales.

"The group is in the process of rationalising its retail estate, consolidating smaller stores into larger flagships. This could lead to a slight dip in offline retail sales, however Inditex will hope this is offset by growth in its online channel and improved profitability due to leaner costs.

"Inditex group has an advanced and competitive online channel compared to peers such as H&M. The company has already exceeded its 2022 targets and could reach 35-40% of sales in the next five years. However, pure-play online retailers such as Boohoo and Shein present a threat to Inditex's online growth as they are marketing aggressively and have very attractive price points.


Harry Barnick also reports on The Restaurant Group: "The Restaurant Group reported close to 5% decline in growth, which was representative of the tough trading conditions for the first half of year when restaurants were forced to close due to the pandemic.

"The casual dining sector has taken a Covid pummelling. Now as customers return the Restaurant Group is operating in a less competitive environment allowing for some breathing space during the recovery period. That being said, we are hearing about aggressive expansion from smaller brands, such as Franca Manca, which could challenge The Restaurants Group's dominant position in the market.

"Given the reduction in operating costs during the pandemic, analysts will be hoping for improved margins post-Covid once trading normalises. This largely depends on how successful The Restaurant Group can be in reducing rental rates. However, testing labour and food shortages could drive up costs in the short-term which limits the margin upside potential.

"Delivery sales grew 146% in the last eight weeks leading up to 29 August. Interestingly, this includes a period where restaurants were open, suggesting the shift we have seen during covid is structural rather than temporary. Investors will now be focused on how this number will trend as restaurants reopen and trading resumes. Early indicators suggest that there has been a permanent growth in this sales channel as some customers opt to eat at home over a dine-in experience

Third Bridge is a global primary research firm that interviews more than 6,000 internationally recognised industry experts and business leaders a year to compile 360-degree market intelligence for institutional investors. www.thirdbridge.com