Interactive Investor

AB Foods receives lift as Primark comes back into fashion

20th June 2022 09:01

Richard Hunter from interactive investor

Quarterly results have been well-received and fashion unit Primark's figures are very promising. Our head of markets runs through the numbers and what it means for the company's prospects. 

Much of the heavy lifting has now been passed back to Primark from the combined food businesses, as the effects of the pandemic begin to drop out of the overall picture.

During the pandemic, the diversified business model which Associated British Foods (LSE:ABF) operates was a blessing. Even now, the Food units as a whole enjoyed a revenue uplift of 10% for the third quarter, largely driven by price increases which offset some of the inflationary pressure.

The Grocery division, which accounts for some 23% of overall group sales, is on track to recover its margins by next year, while strong sugar prices have also provided a tailwind to that unit.

Inevitably, the main focus of interest is the performance of Primark, which represents around 44% of overall sales, particularly given the travails which have recently been reported by other retailers in the sector.

With the shackles of the pandemic now largely removed, the figures are very promising, with the unit seemingly coming back into fashion. Against admittedly easy comparatives when the last vestiges of lockdowns remained, sales in the quarter rose by 81%. Perhaps more importantly, sales versus pre-pandemic levels were also ahead by a more pedestrian 4%, but this nonetheless signifies progress. In the meantime, the group expects to maintain an adjusted profit margin of around 10%.

Summer and travel wear have proved popular as the return of the holiday swings back into fashion, while selective price increases later in the year could decrease the ongoing effects of inflation. There has also been a marked return to the popularity of Primark’s city centre locations, following the return of tourism and an increase in office working.

Meanwhile, the online presence has seen an increase in customer visits, although the offering remains light-touch in that its main purpose is to check stock availability as opposed to being a fully-fledged trading site. With this in mind, the group is to trial a click and collect service aimed primarily at children’s wear, with the company confident that the popularity of the service will justify further expansion.

Primark also continues its international foray, with the US being the source of a potentially lucrative market. Helped along by new store openings, and with more in the pipeline, sales are now up by 34% versus pre-pandemic levels, which bodes well.

However, not all will be plain sailing for the group as a whole. The inevitable inflationary pressures on raw material prices, supply chain disruptions and the most recent strength in energy prices may be too much for the company to bear in price increases alone, while even at the bargain end of the market consumer propensity to spend is likely to be severely tested in the near-term.

In addition, despite group revenues having risen by 32% over the quarter, the company’s full-year outlook remains unchanged, which recognises the scale of the challenges to come. The share price performance has echoed this uncertainty, having fallen by 32% over the last year as compared to a wider FTSE100 which is unchanged over that period.

Nonetheless, this leaves AB Foods undemanding on valuation grounds, particularly given the defensive nature of its business and with many of the building blocks in place for future expansion. The market consensus of the shares as a "buy" mirrors the longer term optimism for the company’s prospects, even if the ride will inevitably be rocky in the meantime.

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