ii view: investors welcome Primark news

AB Foods' half-year dividend was already cancelled, but Primark stores are now reopening. 

Covid-19 update

ii round-up:

Associated British Foods (LSE:ABF) , owner of clothing chain Primark, is now working to reopen all of its 153 stores across England by the 15 June. 

The news comes in the wake of new Covid-19 guidance from the UK government and follows reassuring trading at its already reopened European outlets.

AB Food shares jumped more than 8% in UK morning trading having fallen by more than 20% year-to-date. Shares of rival Next (LSE:NXT)are down by more than 25% over 2020, while Marks & Spencer (LSE:MKS) has more than halved in value. 

For the 12 days from the 11 March, all Primark stores were closed, costing the company about £650 million in sales per month. 

Following the lifting of a number of European coronavirus restrictions, as of the 1 June it has 112 stores or 30% of outlets back open. In Germany, 32 stores opened in mid-May and another 25 in Spain as of late May. 

As of 15 June, it plans to have 281 stores, or 79% of its total selling space, including those in England, open. It hopes to have all 378 of its stores open by late June including those in Scotland, Wales and Northern Ireland. 

Cumulative sales on a like-for-like basis for those stores which had reopened were down on this time last year, although this included mid-city branches in Amsterdam and Berlin that are reliant on tourism. 

Social distancing measures are only expected by management to impact on its busiest outlets, representing around 10-20% of pre-Covid-19 total Primark sales. 

The earlier-than-expected opening of stores improves the firm's cash flow expectations, although management still believes it to be too early to provide full-year earnings estimates.  

ii view:

Founded in 1935 as Food Investments Limited, today ABF has operations in over 50 counties and operates across five divisions of grocery, sugar, agriculture, ingredients and retail.

Group food brand names include Twinings, Ovaltine, Mazzetti, Silver Spoon and Billington’s sugars, Jordans and Dorset cereals, Ryvita, Kingsmill, Patak’s, Blue Dragon and Mazola. 

Diversity of its business divisions and geographical location help Associated British Foods to balance out volatility in food commodity prices such as sugar or currency movements – factors outside of management’s control. A 5% decline in full-year 2019 sugar revenues was largely neutralised by a 4% gain in ingredient sales. 

Primark's discounted offering appeals to consumers battling tough economic times across the UK, Europe and the US. News of a further reopening for its stores is clearly welcome. 

For investors, the scrapping of the half -year dividend payment in April was disappointing, if arguably sensible given the corona crisis. Environmental concerns around Primark and the wider fashion industry’s high product turnover are also worth pondering. But AB Foods remains a well-managed business with room to expand Primark. For now, and despite a still uncertain outlook, its shares remain worthy of long-term consideration. 

Positives: 

• Diversified business type and geographical footprint
• Primark discount offering appeals to wage squeezed consumers

Negatives:

• Closed Primark stores due to Covid-19
• No half-year dividend payment

The average rating of stock market analysts:

Buy