Better buy as UK retail sales slip

Tesco (LON: TSCO) and Ocado (LON: OCDO) share prices retreated on Friday after the latest worrying UK retail sales numbers. Ocado shares retreated to 655p, which was lower than the November high of 945p. Tesco, on the other hand, dropped to 225p, lower than November’s high of 240p.

UK retail sales are falling

Data published on Friday by the Office of National Statistics (ONS) showed that retail sales in the UK slipped in November. In all, sales by volume slipped by 0.4% on a month-on-month basis as online sales declined. This slowdown was partially offset by sales in department stores and household goods shops. In a note, an analyst at Pantheon Macroeconomics said:

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

“The drop in retail sales in November suggests that consumers are buckling under the pressure of surging… inflation, despite additional government support for their energy bills.”

Rising inflation and slow growth have had an impact on UK retail stocks in 2022. Tesco share price slipped by 24% while Ocado dropped by 60%. Ocado’s decline made it one of the worst performers in the FTSE 100 index. 

Ocado has fallen out of favor

For starters, Ocado Group is a leading British company that operates two main businesses. Ocado Retail is an e-commerce business that operates in a joint venture with Marks and Spencer. 

On the other hand, Ocado Solutions provides logistics and automated warehousing solutions to companies around the world. Some of its top clients are retailers like Kroger, Coles, AEON, Morrisons, and Casino among others.

At its peak, Ocado was one of the best-performing UK stocks as investors cheered the company’s growth. Recently, however, it has fallen out of favor among investors as fears of slow growth and lack of profitability continues. Also, the company has struggled to add more partners in its Ocado Solutions business. As a result, Ocado shares have plunged by 76% from its all-time high.

Tesco is a stable retailer

Tesco, on the other hand, is the biggest British retailer that operates thousands of stores and a vibrant e-commerce operation. It also owns a major wholesale operation that resembles Cosco. 

Unlike Ocado, Tesco is a highly profitable company that has stable market share and dividends. The firm has an annual dividend yield of 5.19%, which is a better return than most other companies. 

Tesco share price has also been an underperformer as well. It has barely moved in the past five years and is about 25% below the highest level in 2021. 

Therefore, while Ocado and Tesco have lingering growth problems, I believe that Tesco is a better buy thanks to its steady dividends and growing market share. Ocado is a relatively risky bet that has a clouded path to profitability.