There is an element of pleasant surprise within these results, but is positive momentum sustainable? Our head of markets runs through the numbers.
Associated British Foods (LSE:ABF) diversity continues to play its part, while Primark is back with a bang given changing shopping habits.
As seen with so many other retailers, especially over the Christmas period, there has been a marked return to physical shopping, to some extent at the expense of the higher online levels seen during the pandemic. This particular development plays especially into the hands of Primark, where its online offering remains at a nascent stage. Although there is a trial of a Click and Collect process and a significant in views on its site from a low base, the further rollout to countries outside of the UK is unlikely to drive major growth for the time being.
For Primark, changing shopping habits are something of a blessing. Apart from what had been an increasing trend towards the return to shopping in high streets and retail parks, major city centres have now joined the party and, coupled with a surprisingly resilient consumer, trading over the period was strong and during Christmas in particular.
The Primark business currently accounts for 47% of total group sales, much in line with pre-pandemic levels, and an increase of 15% in the 16 weeks to 7 January is proof positive that the group’s discount offering is capturing the zeitgeist of a cash conscious consumer. In the week leading up to Christmas Day, sales hit a new record.
Primark has been careful on pricing given its place in the market and despite an average level of markdowns, it has been able to pass on some increases – clearly without affecting volumes – such that the average selling price of products has increased, and like-for-like sales have grown by 11%.
At the same time, sales growth outside of the UK continued, with Europe adding 16% (despite a cautious end to the previous financial year) and the US 4%. Further store expansion is very much in the pipeline and the US experiment in particular is gaining traction in what could be an extremely lucrative foray.
The combined Food businesses account for the remaining 53% of group sales and progress has also been notable with an overall 17% increase. The Grocery business is the largest of the food subsidiaries, contributing 21% of overall sales, and the increase of 9% is the lower of those seen elsewhere, with some slack being picked up by strong progress in Sugar, Agriculture and Ingredients.
In the meantime, a strong US dollar continues to add to costs, ranging from freight rates to other countries to buying products from Asia. At the same time, significant cost pressure remains due to inflation, although volatility is subsiding and some commodity costs have fallen. Across the group as a whole, price increases to customers have not been sufficient to offset all of the cost inflation, which has continued to put pressure on overall margins.
Pressure on the consumer in a deteriorating environment, let alone competitor activity, could both yet weigh this year. As such, and in terms of outlook, the group is expecting higher revenues for the year, but lower adjusted operating profit as previously guided.
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On the whole, there is an element of pleasant surprise within these numbers. The group has been able to pull different levers as it navigated changing conditions, and this diversification continues to deliver with Primark now returning to form. Some of this progress had been anticipated by the market, particularly in light of strong Christmas updates from other retailers, and the shares have jumped by 42% over the last three months.
However, this was not quite enough to repair the damage of the last financial period which included a profit warning, and over the last year the shares have declined by 8.5%, which compares to a gain of 6.7% for the wider FTSE100. While the update may prompt some upgrades, the current market consensus remains at a 'hold' until the new course can be shown to be sustainable.
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