Interactive Investor

Primark’s return to form is highlight for AB Foods

28th February 2022 08:07

Richard Hunter from interactive investor

This is a confident half-year update from AB Foods, demonstrating just how important its value retail chain is to group prospects. Our head of markets talks through the detail. 

Primark’s importance to the overall health of the group has been boldly underlined as the level of lockdown restrictions have waned.

Despite another bump in the road in the lead up to Christmas arising from the Omicron variant, for the most part the store estate was open during the period, and this trading update for the six months to 5 March 2022 mirrors what has previously been seen when the shackles are removed at Primark.

First-half sales are expected to have improved by 60% year on year, with operating profit margins around 11%. Indeed, come the end of the half-year, Associated British Foods (LSE:ABF) is expecting both of those metrics to surpass pre-Covid levels.

The habits of the consumer have remained the same, with retail parks and town centres being preferred destinations ahead of city centre locations. The lack of a developed online presence, where the company is hoping to launch an improved website by the end of March, has been something of a headwind during the pandemic, but AB Foods is a diversified business where other units have been able to pick up some of the revenue slack.

Primark has also been able to carry over some autumn and winter inventory from last year which, alongside some targeted focus on cutting store operational costs and overheads, has also boosted cashflow. This comes despite the inevitable inflationary pressures on raw material prices, supply chain disruptions and the most recent strength in energy prices. At the same time, some social media excitement has been stirred by the collaboration with Greggs, particularly among younger consumers.

The US arm is also continuing its strong progress since launch, and total sales are expected to be some 35% ahead of pre-Covid levels. The immensity of the potential market is one where Primark will look to make further inroads.

Nonetheless, the balance sheet remains in comfortable shape, and the net cash figure of £1.5 billion compares with a number of £705 million at the end of the corresponding period last year. At the same time, the net debt figure remains relatively stable at £1.7 billion. In terms of manging cashflow, AB Foods is attempting to offset general inflationary and supply chain pressures through a combination of cost savings and, where appropriate, passing on price increases to consumers.

This is of particular importance in the other businesses within the group, where food price pressures are inevitably having an impact. Even so, these units continue to make a meaningful contribution, with Sugar in particular seeing the benefit of generally higher prices washing through to revenues.

Primark’s return to form is a welcome development for the group, particularly since in better times it accounts for around half of group revenues. The pandemic has, however, inevitably left its stain on profits and therefore the share price performance, which has dipped by 19% over the last year as compared to a gain of 14% for the wider FTSE100, and the weak wider opening of the market has helped deal another slight blow.

Nonetheless, the improvement in prospects resulting from a resurgent Primark is likely to consolidate the market consensus of the shares as a strong buy.

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