Primark behind promising third quarter at AB Foods

Concerns about a consumer slowdown have been brushed aside after a strong period for the FTSE 100 firm's discount clothing chain. Our head of markets analyses performance.

If the consumer is beginning to have doubts about spending, such reticence is not coming Primark’s way.

A bumper third quarter for the retailer, driven by a strong showing from its summer ranges, health and beauty products has moved the dial for the group as a whole, with adjusted operating profit now expected to be moderately ahead of last year.

Primark accounts for 42% of group revenues at Associated British Foods (LSE:ABF), so its better-than-expected quarterly performance is significant. Revenues increased by 13% to £2 billion for the quarter, meaning that in the year to date revenues are now ahead by 15% cumulatively.

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The return of the physical shopper is also being seen as Primark’s flagship city centre stores continue to perform strongly. In addition, a 7% increase in like-for-like sales has been achieved mainly through higher average selling prices, which tends to vindicate the previous decision not to pass on the bulk of price increases at the expense of some margin.

At the same time, Primark is receiving extra attention in terms of both new store openings, with the US continuing to be a particularly intriguing prospect, while the website improvements are also progressing. The website development is arguably long overdue and even at this stage is not as fully functional as it could be, but in the meantime the business is clearly picking up the slack as Primark continues to hit the right price point for cost-conscious consumers.

Elsewhere in the business, price increases which have been passed on are having the desired effect without an overly negative effect on volumes. The Grocery division is the group’s second largest with 22% of revenues and saw growth of 13% over the quarter. Combined with revenue rises within Sugar, Agriculture and Ingredients of 51%, 4% and 10% respectively, overall group sales have risen by 16%, nudging the year to date figure up to stand at an improvement of 17% on the previous year.

The group had previously announced that it was committing capital in protecting its various positions, with an investment of £527 million to be used in building capacity, opening new Primark stores and improving automation and technology where appropriate. The group is also bearing down on costs where possible, and while some of the investment has temporarily worsened the net debt position, shareholder returns have not suffered. The share buyback programme is now £319 million into the £500 million target, while the dividend yield of a slightly pedestrian 2.3% is also well-covered.

Of course, any further deterioration in the economic backdrop could weigh further on consumer sentiment, while central banks attempt, so far unsuccessfully, to put the inflation genie back in the bottle. Even so, one thing which has become apparent over recent months is the British insistence on taking holidays, as evidenced by improving airline and travel numbers, which is often accompanied by a revamp of the wardrobe.

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AB Foods is a diversified business which helps it to mitigate different waves of the economic cycle. At the same time, one quarter’s trading cannot be taken in isolation. Even so, the performance is rather stronger than even the company had been anticipating. The shares have more recently ridden the optimistic waves of consumer discount spending, and are ahead by 21% over the last year as compared to a rise of 3.5% for the wider FTSE100.

The market consensus has yet to mirror the performance despite the shares remaining cheap on a historical valuation basis, with the general view of AB Foods as a 'hold' perhaps open to upgrades after this promising release.