Why Primark-owner AB Foods just hit a 10-month low

In decline for five months already, investors are unimpressed with the latest update. Our head of markets reports. 

The so-called “pingdemic” came at a bad time for Associated British Foods' (LSE:ABF) Primark clothing chain, throttling some of the recovery it had been seeing and holding back sales in its fourth quarter.

Footfall was affected by the caution of consumers to shop as well as those needing to self-isolate, with like-for-like sales down by 17% for the final quarter of the year to 18 September 2021 as compared to two years ago. 

Outside of the UK, various restrictions were in place in different locations over the period, further hampering progress, except for the now profitable US presence where like-for-like sales rose by 3% compared to two years previous.

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However, when access to the stores was unfettered, the picture was extremely bright. A combination of pent-up demand and very high basket sizes propelled sales and, since the easing of further restrictions, sales of the likes of the back to school ranges started strongly. 

At the same time, the management of inventory levels has been essential in mitigating the damage, and the group managed to sell all of the stock held over from last spring and summer, with similar expectations for the upcoming autumn and winter ranges. 

This prudent management is also reflected in the expected numbers for the full year, where the power of the group’s cash generation is likely to result in a net cash position of £1.9 billion. That compares with £1.5 billion at the end of the third quarter and £1.6 billion last year, providing AB Foods with a war chest in the event of future unforeseen challenges. 

Equally importantly, adjusted operating profit for the year, which will excludes a £96 million repayment of furlough monies, is expected to exceed last year’s number. This has also been underpinned by a Grocery division which is holding its own and from Sugar, which represents 12% of overall revenues, which is expected to post an increase in full-year revenues of 7% after a strong final quarter and the ongoing success of the Illovo brand.

One of the key limitations around Primark has been the lack of an online presence, which the group is now looking at least to partially rectify. The initial design and development of a new digital platform is underway, with expectations that this can be rolled out next year.

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In all, though, the group continues to reap the benefits of its diversified model both by business lines and geography. The effective profit upgrade and the future potential for Primark’s expansion, including but not limited to overseas, is a strong building block. 

The more recent headwinds for Primark, in particular, have held back the share price, which has risen just 2% over the last year as compared to a gain of 16.5% in that period for the wider FTSE100, but investor appetite for the stock is undiminished. The market consensus of the shares remains rooted to a ‘strong buy’ with the longer-term picture in mind.