Food sales offset lockdown losses for Primark owner

by Richard Hunter from interactive investor |

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Pandemic proves the worth of a diversified business model for this stock.

Primark owner AB Foods (LSE:ABF) has once more underlined the importance of a diversified business model, which has helped to lessen the impact of an extraordinary year on trading.

The results run to a year which ended in mid-September, such that the first round of the pandemic can now be consigned to the history books.

The group has already made reference to the Covid-19 second wave. The imminent UK lockdown is likely to result in 57% of its store estate being shuttered, at a cost to sales of £375 million. 

This will be galling for retailers in general, particularly in the important lead up to the festive season. However, if the lockdown is lifted as planned in early December then Primark will be well positioned to pick up the reins for a hectic few weeks of trading.

In terms of these numbers, much of the groundwork was previously laid in a detailed trading update in early September.

Even so, given many stores were closed for a lot of the trading year, the overall result was undoubtedly improved by the company’s swift action in mitigating a complete lack of income for its Primark stores.

The group now estimates this cost £2 billion in sales, £650 million in profit and a cash outflow of £800 million.

To have ended the period with net cash of £1.6 billion is therefore a significant achievement. In addition, the group retains access to liquidity of some £3.1 billion, and these combined figures represent strong protection against the current strain on revenues.

At the same time, important though Primark is to the AB Foods stable, the pandemic also saw a shift in contributions as the diversity of the business showed its value. 

For the year, Grocery accounted for 42% of adjusted operating profit, Primark 35%, Ingredients 14%, Sugar 10% and Agriculture 4%. 

Excluding Primark, the combined adjusted operating profits of these other units rose by 26%, which lessened some of the corporate pain. This was not enough to rescue the overall figures, however, which saw a decline of 12% in revenues and a drop of 34% in pre-tax profit, although the latter was comfortably ahead of expectations.

In terms of outlook, the new lockdown is an unwelcome development for retailers in general. 

Even before the latest announcement, Primark had not recovered footfall to many of its flagship city centre stores, although some of this slack had been taken up by out-of-town retail parks. 

In addition, the company cannot fall back on an online offering as is the case with many of its competitors. More positively, the company remains sanguine on the UK/EU Brexit negotiations, stating that the structure of its supply chains can withstand any outcome, resulting in a limited impact to normal business operations.

The lack of a dividend is disappointing if understandable news, and comes against hopes that at least a reduced payout was to be made. It is likely that the dividend is simply the victim of the latest announced lockdown, as the company attempts to hunker down once more.

The share price has unsurprisingly borne the brunt of the lower revenue and profit figures and has declined 23% over the last year. This is largely in line with the wider FTSE 100 which dropped 22% in that period. The shares have drifted just 2% over the last three months, although the damage in the year to date had already been done, and AB Foods’ shares have lost 34% so far in 2020.

However, with Primark poised to resume growth when it is allowed to do so, and with the group’s diversified business model picking up some of the slack as it has done during this difficult period, prospects are brighter than they have been for some considerable months. 

As such, the market consensus of the shares as a ‘buy’ will likely remain intact.

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