Join our community of smart investors

Primark recovery sees better-than-expected fourth quarter for ABF

While still down significantly from last year, adjusted operating profit at Primark is set to reach the top end of the £300m-350m guided range
September 7, 2020

Associated British Foods (ABF) saw a handy 3 per cent uptick in its share price after announcing that trading in the fourth quarter has exceeded its expectations. This was led by the smaller food businesses, which focus on agriculture, grocery, sugar and ingredients. Amid higher grocery retail sales volumes, improved EU sugar prices and increased demand for yeast and bakery products, the group is guiding to a “very strong increase” in the aggregate adjusted operating profit of its food businesses for the year ending 12 September. Analysts are currently pencilling in £705m of profit from these segments, up from £584m in 2019.

IC TIP: Hold at 2,080p

Over at discount fashion chain Primark – which accounted for around two-thirds of adjusted operating profit last year – sales have been “reassuring and encouraging” since stores were reopened from May, benefitting from a recovery in footfall. When Primark initially threw open its doors after lockdown, the average basket size was “significantly higher” than a year earlier, reflecting pent-up demand. While this effect has tempered somewhat, customers are still filling up their baskets more than a year ago. The past four weeks have seen Primark record its highest ever value and volume share of sales for this time of year.

But clothing retail sales remain below pre-pandemic levels. Sales since reopening to the year-end are expected to come in at £2bn, with UK like-for-like sales 12 per cent lower than a year earlier. Revenue has been pulled down in particular by the four biggest destination city centre stores which have suffered from a lack of tourism and commuters. Excluding these sites, UK like-for-like sales were down just 5 per cent during this period.

Still, on the back of this performance, ABF believes that full year adjusted operating profit at Primark will now hit “at least” the top end of its £300m-350m guided range - although this is far below the £913m recorded a year earlier.

The better-than-expected summer trading means Primark has shifted more of its inventory than previously anticipated – it had booked a £284m exceptional charge at the half-year stage for surplus clothing stock. But having sold stock in stores and a “significant proportion” of its stock on hand, ABF is guiding that it will only carry around £150m of its spring and summer inventory into next year. This has been achieved without offering discounted prices en masse. The improved working capital position means ABF will now end the year with £1.3bn of net cash (excluding lease liabilities), far higher than its previous guidance of “in excess of £750m”. There’s no word yet on whether a dividend will be declared this year after the interim payout was scrapped in April.