Interactive Investor

AB Foods flags Primark boom despite Omicron

20th January 2022 08:20

Richard Hunter from interactive investor

Shoppers are back at Primark and owner AB Foods expects further significant outperformance from its value fashion arm in the months ahead. Here's what our head of markets has to say.

With Primark now off the leash, a strong return to form has boosted overall revenues, with a high possibility of more to come.

Associated British Foods (LSE:ABF) had previously anticipated that Primark would have significantly better sales than in the previous comparable period due to less pandemic trading restrictions, and the numbers have certainly not disappointed so far. Except for some brief closures in the period in Austria and the Netherlands, the store estate was open and the result is a hike of 32% in retail revenues.

Contributing to this figure is more evidence of Primark’s increasing presence in the US, where sales improved by 37% as compared to two years ago. Nor is the company resting on its laurels with regard to strategy, with an improved website due to land in the UK by the end of March. Previously something of a blind spot for Primark, starkly highlighted during the pandemic, the development should give the brand some insurance against any future variants, and nudge the company towards the increasing necessity of an online presence for retail success.

Meanwhile, consumer trends remain as footfall to retail parks and town centres continues to outweigh visits to city centres. Some of the growth seen in the period was interrupted in December by the emergence of the Omicron variant, although the company notes that this effect is beginning to diminish.

Operating profit margins are also ahead of the group’s own expectations, driven by these higher volumes, tight stock control and an ongoing focus on cost savings where possible. In terms of outlook, AB Foods is expecting further significant outperformance from the Primark arm, which now accounts for 48% of group revenues, up from 40% at the full-year results.

Elsewhere, food revenues have posted a gain of 5%, despite a dip of 1% from the Grocery division which is the second largest segment within AB Foods, responsible for 22% of revenues. The group as a whole has highlighted the somewhat debilitating effects of inflationary pressures in the form of raw materials, commodities, energy and the supply chain, where longer shipping times are likely to continue for some time. The company’s reaction to these pressures has been to increase prices where possible, alongside operational cost savings.

Given the turbocharge provided by Primark, overall group revenues for the period rose by 16% and the outlook remains unchanged, with the company expecting significant improvements in adjusted operating profit and earnings per share at both the half and the full year.

In the meantime, the share price has diverged somewhat from prospects. Despite a hike of 19% over the last three months, the price remains down by 6% over the last year, as compared to a hike of 12.6% for the broader FTSE100 index. This in turn contributes to a dip of 20% over the last two years, highlighting the ground which needs to be recovered.

Even so, if the shackles continue to loosen on the vital Primark arm, the group should be poised for stronger prospects and the market consensus of the shares as a "strong buy" echoes this possibility.

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