ii view: Primark profits recover but costs soar and share price slumps

Now largely through the pandemic, does this FTSE 100 company face a new challenge? We assess prospects. 

First-half results to 5 March

• Revenue up 25% to £7.88 billion
• Adjusted operating profit almost doubled to £706 million
• Net debt including lease liabilities of £1.66 billion
• Interim dividend up 123% to 13.8p per share

Chief executive George Weston said:

"Our food businesses have once again proved their operational resilience and Sugar had another strong period, building on its recent track record of recovery. Measures to mitigate higher costs in all our businesses have been taken and more are planned. 

"Looking further ahead, inflationary pressures are such that we are unable to offset them all with cost savings. However, we are committed to ensuring our price leadership and everyday affordability, especially in this environment of greater economic uncertainty."

ii round-up:

Food maker and Primark owner Associated British Foods (LSE:ABF) today reported a recovery in both overall sales and profit but warned of inflationary pressures going forward.

Primark sales rose 59% year-over-year as pandemic restrictions lifted, with food revenues up 6%. Net debt remained steady while the interim dividend more than doubled. 

However, cost pressures, particularly for its food business, remain elevated. Despite cost saving measures and product price increases, the hit to the food profit margin is now expected to be greater than previously estimated. A similar picture at Primark was being seen, although its second-half adjusted operating profit is still expected to be ahead of that generated last year.

AB Food shares fell by more than 5% in UK trading, adding to a fall of close to 30% over the last year. Shares for clothing and household goods retailer Next (LSE:NXT) are down by closer to a quarter over that time. The FTSE 100 is up around 6%. 

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Adjusted operating profit for the company's combined food business retreated 9% to £330 million. Operating profit for Primark rose to £414 million from last year’s pandemic-hit £43 million. Primark will now push through selective price increases to some of its autumn and winter ranges. 

The profit outcome broadly meet City expectations with the lowering by management of its full year profit margin hopes the key negative. 

A third-quarter trading update is scheduled for 20 June.  

ii view:

Started in 1935, AB Foods is today a multinational food processing and retailing business headquartered in London. It employs over 125,000 staff in more than 50 countries. Its retail division Primark operates across 12 markets including the USA. Geographically, the UK generates its biggest slug of sales at around 37%. Europe and Africa account for a close 36%, with the Americas and Asia making up the balance. 

Group strategic initiatives currently include expanding its Primark store numbers to around 530 outlets come 2026 from a current approximate 400. Launching a new, improved customer-facing website in the UK and simplifying its in-store UK retail management structure. 

For investors, inflationary cost pressures are proving an increasing headwind. The lack of a significant online presence over the course of the pandemic contrasts with that of clothing rival Next, while economic uncertainty and geopolitical tensions continue to warrant consideration. 

On the upside, both overall group sales and operating profit have returned to pre-Covid levels. Expansion of the retailing business is being pursued, while an estimated future dividend yield of close to 3% is not derisory in a continued environment of low interest rates. In all, and while the group remains well managed, pandemic caution has now been replaced by cost pressure concerns, potentially leaving the shares facing a difficult period.

Positives: 

• Diversified business type and geographical footprint
• Targeting 530 Primark stores from around 400

Negatives:

• Economic outlook uncertainty
• Many factors outside of its control like commodity prices and currency moves 

The average rating of stock market analysts:

Buy