Ocado Comes Out on Top Instead of M&S

Despite being one of the worst stock performers this year, Ocado stays on the UK blue chip index, ironically thanks to the better performance of its partner, M&S, which failed to enter the index due to Ocado's survival. Is a turnaround in store?

The Elusive Profit

Ocado shares peaked in September 2020 as the covid pandemic pushed shopping online. But, since then, shares have fallen more than 85%, and it's the worst performer on the FTSE 100 this year. It was on track to be booted from the blue-chip index, but its share price rebounded the week before the index reshuffle deadline, though it is still down 40% this year. Ironically, the price rebound was thanks to its partner, M&S, which failed to make it into the FTSE 100 index partly thanks to Ocado's share price rebound.

The company has done two years of reporting negative results, despite delivering growth during the pandemic. More worrying for investors is that those losses have grown, and EBITDA turned negative last year. Most recently, the company affirmed guidance that its operating margin would return to positive this year, assuming a return in volume growth. But with inflation remaining stubbornly high, that might be a challenge. Last year, only the logistics division pulled in a profit, with retail - the vaunted JV with Marks & Spencer - falling into negative.

The M&S Lifeline

The bulk (88%) of Ocado's revenue comes from its 50-50 partnership with Marks & Spencer, where hope for the company lies and supported recent price moves. M&S's generally more affluent customer base has proven to be more resilient in the face of the cost-of-living crisis, particularly with groceries. This supports hopes that volumes could rise in online retail space with inflation finally coming down.

Active customers have increased by 13.8% this year, with the average basket value staying the same. Customers are buying the same amount; it's just that the money covers fewer products. Despite an average sales increase of 8.3%, orders have increased since the start of the year. Ocado continues to expand its range of M&S products, which the CEO sees driving growth for online sales.

However, Ocado staying in the FTSE and M&S not might not be a permanent feature, as the latter's market cap has expanded to £3.6B, while Ocado's has slipped to £3.2B. The next check-in for a profit development from Ocado is the half-year report on July 18.

M&S Faces Obstacles Ahead

After breaking past the range top of 170 GBX, M&S stock price has accelerated towards the golden pocket near the 200 GBX level but remained slightly away from the round resistance. M&S bulls got stopped by the 138.2% inverse Fibonacci of the first impulse leg from the low of 91 GBX to the high of 166 GBX, with a break past opening the door to the golden extension at 212 and the 78.6% Fibonacci retracement of 225 GBX before the peak. Since prices trade within an upward channel, only a break under the lower end would expose the correction low of 135 GBX, but a slide under the 50% Fibonacci of 177 GBX would increase the chances of that happening.

Key Takeaways

Despite being among the worst performers on the FTSE 100 this year, online supermarket Ocado held onto its spot on the blue-chip index, while its partner Marks & Spencer failed to make the list. Ocado's share price rebounded in the week before the reshuffle thanks to M&S and their partnership, as it accounted for 88% of Ocado's revenue. Although both companies have suffered losses, M&S's market cap has grown to £3.6bn as Ocado's slipped to £3.2bn, suggesting a reversal in their positions could eventuate.