AB Foods back on form as shoppers flock to Primark

The bargain clothes retailer has been making up lost ground now lockdown is over.

For Primark, a combination of prudent financial management, a well-diversified business and racing out of the traps since the reopening of its stores has seen a return to form for owner Associated British Foods (LSE:ABF).

Of late, Primark has been responsible for around two-thirds of group operating profit, with plans to expand the brand further internationally.

From the reopening of stores until the year end, cumulative sales are expected to hit £2 billion, propelled by higher footfall and a significantly higher average basket size. Indeed, in the last four weeks Primark has enjoyed its highest-ever value and volume shares.

Some of this boost will have been the result of significant pent-up demand, but the fact that the most recent numbers are at record levels should undo some of the damage inevitably suffered during the lockdown. At the worst point, store closures were estimated to have resulted in lost revenues of £650 million per month.

In addition, at the previous update the company set aside a charge of £284 million for overhanging inventory. In the interim, Primark has been able to sell some of the existing stock in store and a good proportion of the stock in hand, such that the book value of stock carried over is now likely to be £150 million.

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This unexpected boost has been a major contributor to a net cash balance which is expected to stand at £1.3 billion by the year end. This is not only a significant improvement from the previous estimate the company provided, but also puts the group in a strong position to weather any imminent financial storms.

There remains work to do, however, since many of the group’s flagship city centre stores are largely reliant on tourist revenue which has all but evaporated.

The pandemic has also had an inevitable effect on high street and shopping centre stores, although there has been some mitigation with an increase in business at retail parks.

There are also some concerns around whether the customer will continue to spend post-lockdown, when the current recession and end of the furlough scheme both conspire potentially to increase unemployment and depress consumer confidence.

The company has a sanguine view of the resuming Brexit negotiations, stating that its supply chains are largely separate in the UK and Europe (and, indeed, in the US). It therefore thinks any restriction on cross-border trading should have a lower impact.

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Meanwhile, the group’s diversity in terms of business lines continues to pick up some of the slack left by Primark during lockdown. The grocery unit will see increased second-half revenues on increased retail demand, sugar revenues will be well ahead of last year following a strong recovery in EU sugar prices, and the agriculture unit should also provide increased adjusted operating profit.

In all, this is a promising update. Of course, the fact remains that the damage has largely been done for the year. Even with adjusted operating profit now expected to come in at the higher range of the £300 to £350 million previously guided, this still compares to a previous year figure of £913 million.

This has largely been factored into a share price which remains down by 14% over the last year, as compared to a decline of 20% for the wider FTSE 100.

More recently, there has been a spike of 25% since the March lows since the trading picture has become clearer. Indeed, it appears that AB Foods has been largely concentrating on the factors within its control and its stronger financial position is largely the result of this focus.

With the business performing across all units and with Primark being warmly welcomed back by consumers, the market consensus of the shares as a ‘buy’ is most likely to remain intact on these improving prospects.