Primark closures hit AB Foods’ profits, but year ahead looks bright

Diversified business serves AB well, and the end of lockdown could be a turning point.

Primark store closures have inevitably punched a hole in its profits, according to a trading update today, but the diversified nature of the business is serving owner Associated British Foods (LSE:ABF) well.

Changing habits arising from the pandemic have boosted other parts of the business. In Grocery, which accounted for 42% of adjusted operating profit at the full-year, consumption from home has been beneficial for sales.

Twinings Ovaltine is seeing a surge, particularly in South East Asia and France.

The growth in home baking, meanwhile, should result in improved revenues at the Ingredients arm, which contributed 14% to profits last year.

The estimated hit from the pandemic for Primark, which accounts of 35% of group profits, is a loss of sales amounting to £1.1 billion. Even in the recent periods when stores were open, there was still a struggle to lure shoppers to large destination city centre stores due to local travel restrictions and the virtual disappearance of tourism.

This inability to visit stores, exacerbated by the lack of an online offering, also extended to regional high streets and shopping centres, although there was some mitigation from retail parks. There were, nonetheless, strong signs of potential recovery when the doors were briefly opened.

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In addition, the company continues its store-opening programme internationally, with a US presence of around a dozen outlets already showing signs of success, particularly over what became a sold-out period for the company’s Christmas lines.

With more stores in the pipeline and further tentative moves into parts of Europe, the Primark brand is discovering new ways and places in which it can appeal to its target audience.

In the meantime, the group as a whole is anticipating net cash of £650 million at the end of the half-year, which is a notable achievement. Bearing down on costs and the experience of previous lockdowns, along with the lack of dividend payments have each contributed to cash conservation on a significant scale.

While the Primark effect will leave its mark with lower sales, profits and earnings per share for this period, prospects for AB Foods are bright given a strong combination of factors.

The group is well-diversified, with a strong balance sheet, which has helped it to weather the storm. Primark’s international expansion opens up new and potentially profitable doors, and, in the meantime, the easing of restrictions may well result in a coiled spring effect as pent-up demand unleashes.

The shares have had a reasonable run of late and are up by 8% in the year to date, and 19% over the last six months. Over the last year and all things considered, a decline of 4%, as compared to a drop of 5% for the wider FTSE 100, is a resilient performance.

As such, the market consensus of the shares as a strong ‘buy’ reflects hopes for what could be a significantly brighter year ahead.