Primark has returned to being the driver of growth for Associated British Foods (LSE:ABF), with its strong recovery after a damaging pandemic period showing further signs of acceleration.
Following a bumper third quarter, sales at Primark are now expected to hit £9 billion for the 12 months to 16 September 2023, which would represent growth of 15% over the previous year and of 9% on a like-for-like basis.
For the business overall, management said the outlook for this financial year is now "slightly better than previous expectations of group adjusted operating profit to be moderately ahead of last year". In June, it upgraded the forecast to "moderately ahead" from "broadly in line".
Given the widely reported constraints on consumer spending, this has somewhat ironically played into Primark’s hands given its value offering. At the same time, a warm reaction to its new ranges and strongly performing new stores have added to the optimism, while the group has also been able to pass on selective price increases without harming volumes in an effort to contain its own rising costs.
Indeed, Primark’s outlook is poised to benefit from a number of factors swinging in its favour. Lower material and freight costs, favourable exchange rate movements and price increases are likely to offset its own input costs inflation, with the expectation of a strong recovery in adjusted profit margin in the next financial year from the current number of around 8%. However, the current level could be the source of some disappointment after the update, being slightly shy of estimates given some German restructuring costs and higher than expected stock loss.
The group is also looking to enhance a website offering which is still pedestrian compared to most of its competitors. The latest development is an extension of the Click & Collect offering to the womenswear range, which adds to the current kidswear line. Progress is probably overdue and the group has been investing in automation and technology generally to help margins along.
While the net debt position has therefore come under strain, it is still at a comfortable level, and has not impacted a share buyback programme of which £442 million of the proposed £500 has been completed. At the same time, a pedestrian dividend yield of 2.2% is adequately covered.
Primark’s foray into the US is looking increasingly intriguing. In a land of major opportunity, the group is steadily increasing its presence, and with four new stores opened in the last three months and with fourth-quarter sales expected to rise by 45%, this area of growth is certainly one to keep an eye on.
AB Foods is an unusual group, with its idiosyncratic nature covering many of the economic cycles. This diversification came into its own as Primark suffered during the pandemic and, with that part of the business now firing on all cylinders, the current performance of the likes of Grocery, Ingredients and Agriculture are a welcome bonus, with a much stronger outlook for Sugar following previous production problems.
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Of course, any further deterioration in the economic backdrop could weigh on consumer sentiment, as central banks continue their attempt to put the inflation genie back in the bottle. Even so, one thing which has become apparent over recent months and has been reinforced by this update is the British insistence on taking holidays, as evidenced by improving airline and travel numbers elsewhere, which is often accompanied by a revamp of the wardrobe.
AB Foods shares have been quietly making strong progress, even though the market consensus has remained fairly neutral over recent times. A share price increase of 48% over the last year compares to a marginal gain of 0.3% for the wider FTSE100 index.
The current margin number may have taken some of the shine from the update, but the potential of easing inflation, clear growth prospects and an undemanding valuation by historical standards could result in some upward pressure on the general view of the shares as a 'strong hold'.
Annual results are scheduled to be announced on 7 November.
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