Associated British Foods shelves dividend as profits tumble

Associated British Foods (ABF) opted not to pay a final dividend despite finishing the year profitably, with a battling performance from its Primark business and an uptick in food sales. The coronavirus pandemic has cost Primark £2bn in sales and £650m in profits, following several months of store closures earlier this year.

As European governments ordered the shuttering of non-essential retail in March, Primark’s woes were compounded by the absence of an online sales channel. “Unable to sell anything, Primark moved from profit to loss in a few short days,” ABF chairman Michael McLintock said, “with no visibility as to how long these conditions would persist.” 

Primark experienced an £800m cash outflow while its stores were closed after fulfilling supplier payments and incurring operating losses, although it succeeded in cutting monthly overheads by a half with pay reductions and landlord support. ABF recorded a £284m provision against the value of Primark’s inventory at its half year, which was subsequently released after stores were reopened earlier than envisaged. Primark is carrying £150m in spring and summer inventory into its next financial year.

The UK’s retail sector had been on the mend since the easing of restrictions, with retail sales having risen for the fifth consecutive month in September according to the Office for National Statistics (ONS). Many shoppers have, however, remained nervous about reentering stores as the pandemic remains at large, while consumer confidence fell in September at its highest rate since May, according to the ONS. Fast fashion brands like Primark have also come under pressure since revelations surfaced about boohoo’s (BOO) supply chain in the summer, as growing sustainability concerns shine a spotlight on cheap clothing.

In September, ABF said that it had been encouraged by the performance of its Primark stores since their reopening in May, with its average basket size much higher than a year earlier in a sign of pent-up demand. ABF’s UK retail sales were 12 per cent down on last year in the period after its stores reopened, with European sales down by nearly a fifth. Retail profits fell to £148m from £913m last year, a decline of 84 per cent.

But new lockdown measures will weigh heavily on Primark. In the six weeks from 22 November to 26 December, UK high streets and shopping centres are expected to see footfall drop by 41 per cent and 37 per cent respectively, according to Springboard data. ABF warned yesterday that new restrictions across Europe would close over half of its selling space, costing these stores an estimated £375m. 

The group has, however, been able to reap the benefits of a surge in grocery shopping during lockdown. Last year, retail profits accounted for three quarters of overall profitability (excluding interest payments), while groceries made up less than a quarter of profits. Groceries overtook retail to become the group’s main contributor, increasing its pre-interest profits by 42 per cent to £379m and providing almost half of the group’s profits on this measure. Retail, meanwhile, made up just 29 per cent of profits, excluding interest.

Along with falling sales, ABF’s overall profitability was hit by £156m in exceptional costs, £116m of which are linked to a write-down of Primark stores. The inclusion of ABF’s lease interest charge in this year’s income statement, in line with updated accounting rules, also weighed upon profitability. This drove up ABF’s charge for its net finance expense and other financial income from £15m in 2019 to £110m.

Despite the uncertainty ABF has faced this year, it has forged ahead with store openings, adding 12 new outlets in the year. The pandemic has slowed its opening programme, although the group retains plans for a further 14 in its new financial year across Europe and the US.

Consensus figures are for earnings per share of 122p in 2021, rising to 143p in 2022.

It doesn’t come as a total surprise that the group has opted against paying out a dividend this year. It spent £271m alone on its final dividend last year, which would have eaten into a significant chunk of this year’s cashflows at a time when the group is set to miss out on sales during a vital trading period for the company. Pressures on consumer incomes will override the sustainability qualms of many, as evidenced by the queues that stretched round Primark stores following their reopening, while current restrictions could feasibly only run for a few weeks - time will tell. With the shares trading at 14 times 2021 earnings estimates, at a fairly steep discount to last year’s multiple of 29, we remain content with our hold rating as the retail group continues to tread water.