Two key European retailers saw dramatic gains on Tuesday following their change in strategy as COVID-19 continues to hit markets.
H&M (HM-B.ST) shares saw a steep rise after the fashion retailer reported a return to profit in the third quarter, surging well beyond analysts’ expectations. Shares rose as much as 12% since market open on Tuesday.
The Swedish clothing retailer estimated pretax earnings would reach roughly 2bn krona (£177m, $228.5m) in the three months to the end of August, based on preliminary results — eight times the average analyst estimate and almost double the highest forecast, according to Bloomberg.
H&M also credited fewer discounted sales and strong cost control as being key to helping it rebound from the impact of coronavirus lockdowns across Europe and the US. During the peak of the pandemic, the business was forced to shut down four in five stores globally.
Low-cost fashion retailers, including Primark (ABF.L), have also seen gains as consumers begin to return to shopping for casual wear they can use while working from home.
Online supermarket Ocado (OCDO.L) has also directly benefited from the COVID-19 pandemic, with demand for grocery deliveries increasing in the third quarter. The appetite for online grocery delivery has been so great that the company has only just begun to address a waiting list of one million potential UK customers.
The unprecedented demand has helped Ocado report a 52% rise in third-quarter revenue. The expansion of its retail arm, which started selling food from Marks & Spencer (MKS.L) this month, is expected to boost full-year earnings to at least £40m ($51.5m). That’s ahead of a market consensus of about £26m.
Ocado shares have been gaining since market open on Tuesday, up almost 6% at noon in London.
“The timing of the joint venture’s operations going live couldn’t have been any better,” said AJ Bell investment director Russ Mould.
“Marks & Spencer has effectively flicked the switch exactly at the point when people across the country have become reliant on ordering groceries online. Just imagine if it hadn’t had the deal with Ocado in place — Marks & Spencer would have looked foolish for being the one UK food seller woefully behind with its digital strategy at a time when there has been a radical shift in consumer behaviour.”
Still, Mould says profit remains a “long way off” for Ocado, but it is laying the foundations for future earnings.
“The joint venture is a huge deal to Marks & Spencer, but it is just a cog in the machine for Ocado as its attentions arguably lie elsewhere,” he said. “It is in a sweet spot as the grocery sector around the world races to strengthen their digital capabilities and Ocado could easily pick up some big contracts in the coming year or two to supply its systems.
He added that the company needs “to spend a lot of money on that journey.”
With both stocks pointing higher, other analysts add that they are hinting to modest but reassuring signs that the retail sector and the economy as a whole could be seeing a long-term economic tailwind.
Chris Beauchamp of IG said “investors seem content to pile back into the sector.”
Yet he added that “as lockdowns return some questions over the sustainability of the rally in non-supermarket retail should remain.”