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Associated British Foods - Primark store closures to hurt sales

Sophie Lund-Yates, Equity Analyst | 16 March 2020 | A A A
Associated British Foods - Primark store closures to hurt sales

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Associated British Foods Ord 5,15/22p

Sell: 1,800.50 | Buy: 1,804.00 | Change -55.00 (-2.93%)
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ABF expects adjusted operating profit in the first half to be ahead of previous expectations, thanks to improved margins.

However, disruption from the coronavirus outbreak means the group has closed a number of European Primark stores. ABF said it's too early to "provide earnings guidance for the remainder of the current financial year."

Following volatile trading after the announcement, the shares were down 11.7% at the time of writing.

View the latest ABF share price and how to deal

Our view

Despite what the name might suggest, fashion, not food, drives ABF's results.

As the owners of Primark, fortunes are closely tied to appetites for its cut-price clothing, and Primark's expansion across the Atlantic is of particular importance. The American market offers huge growth potential, and with only a handful of stateside stores up and running there's probably decades of growth on offer if Primark can nail its proposition.

Early signs are good, with the Brooklyn store - opened last summer- recording a particularly strong performance. It's good to see ABF making waves across the pond, but taking a big chunk of US market share is still a long way off.

It's a slightly different story in Europe and the UK, where Primark is much more established. Sales growth is being driven by new store openings, which is offsetting weaker like-for-like performance. But only so much juice can be squeezed from that particular orange - eventually high streets are saturated with Primark stores.

Coronavirus is an added headwind, with European store closures and lower footfall elsewhere hitting sales. It's too early to say what the overall impact will be, but it's something to keep an eye on as the outbreak progresses.

On the plus side, the Sugar business - which is the other division capable of moving the dial - is doing ok for now. Chinese supply issues have been pretty much sorted out, although of course we can't guarantee what will happen from here.

At time of writing the shares are trading at 12.1 times expected earnings which is some way below the longer term average, and likely reflects concerns the market has around the impact of the virus. The group currently offers a prospective yield of 2.8%, but remember I this isn't guaranteed, and a lot will depend on how the current disruption to trading progresses.

For now, ABF has a strong net cash position which should offer some shelter in difficult conditions, although keep in mind we still can't say how long these conditions will last. Away from coronavirus, cracking the US remains an important thing to keep an eye on at ABF.

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Half Year Trading and COVID-19 Update

Higher margins at Primark and in the Grocery business mean adjusted earnings per share will be higher than last year, on both a lease-adjusted and reported basis.

In Italy, France, Spain and Austria Primark stores have been forced to close. These shops account for 30% of Primark's sales, and Primark had expected to generate £190m from these sites over the next four weeks. They'll remain closed until they are permitted to open by the respective governments.

For the rest of the Primark estate, including the UK - which accounts for 41% of sales, like-for-like sales have been declining over the last fortnight. This trend has worsened over the past few days. ABF doesn't expect it will be able to offset the impact of these lost sales.

In the sugar business, the situation has improved following the announcement of potential Chinese supply issues in February. Supply shortages from that country are now expected to be minimal.

The group said it "had not seen a material impact" on the sugar, grocery, ingredients and agriculture businesses.

ABF said it has a net cash position of £800m and significant undrawn bank facilities. Half year results are expected on 21 April.

Find out more about Associated British Foods shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.