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Associated British Foods - Primark reopening, trading reassuring

Emilie Stevens, Equity Analyst | 1 June 2020 | A A A
Associated British Foods - Primark reopening, trading reassuring

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Associated British Foods Ord 5,15/22p

Sell: 1,889.00 | Buy: 1,890.00 | Change 1.50 (0.08%)
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112 Primark stores are currently trading, accounting for 34% of total store space, as lockdown restrictions ease in Europe. This is expected to rise to 281 (79%) by June 15 as some UK stores open. That's ahead of the group's initial timeline and as a result ABF expects cash flow to improve in the second half of the year.

ABF's food businesses have continued to trade throughout the crisis. Operating profits in Grocery are ahead of previous expectations, offset by weakness in AB Sugar.

The group is not providing any guidance for the full year.

The shares rose 3.8% following the announcement.

View the latest ABF share price and how to deal

Our view

The easing of lockdown restrictions is good news for Primark - ABF's largest division. By the end of summer the group expects at least 84% of total selling space to be open.

Clearly open stores are better than closed ones, but getting back to normal will take time. Early signs are promising, shoppers have been queuing to get in and spending more once inside. However, social distancing rules limit footfall and will prevent Primark's busier stores from reaching pre-coronavirus levels.

Lower sales together with a relatively fixed cost base does not bode well for profits. It's good news therefore that Primark's been able to beat its own target of reducing overheads by 50%. We suspect that, as one of the few retailers taking on new space, the group enjoys something of a whip hand with struggling retail landlords.

Excess stock built up while stores were closed is also something that could hurt profits. We had feared a big moment of discounting once shops reopened, so it's a relief to hear that no abnormal discounting is planned. Primark thinks it can sell the items for full price this year or put them into storage for 2021.

However, while Primark is key, it's not the whole story and that adds to ABF's resilience. ABF's various food businesses account for around 35% of group operating profit.

These businesses have kept going throughout the pandemic, supplying food, animal feed and pharmaceuticals. The Grocery division in particular has benefitted from increased retail sales, which is expected to boost operating profits this year.

While it's far too early to say how things will pan out, we think ABF is one of the better placed names in the retail sector. That's partly because it has significant non-retail businesses, diversifying earnings, but also reflects a relatively healthy balance sheet and strong negotiating position with landlords.

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Trading details

Early signs from reopened Primark stores are said to be both "reassuring and encouraging", with queues outside most stores and customers spending more. Only four stores had initial sales under half of what they were last year.

Consumer demand is said to have been strong for children's, leisure and night wear, along with summer products such as shorts and t-shirts, reflecting good weather in markets where stores are now open.

Social distance restrictions have capped the hourly footfall of each store. ABF said this should only impact trading at the busiest stores and some stores at peak times. However, the restrictions will prevent these stores, some 10-20% of total sales, from reaching pre-coronavirus trading levels.

As stores started to reopen, Primark had £1.5bn in stock, compared to typical stock holding of £0.9bn. However, the nature of the items means Primark expects to be able to sell these at a later date rather than discount them.

In its Food businesses ABF has maintained production throughout the pandemic and as a result total operating profit is expected to be in line with previous guidance.

Grocery operating profits will be higher than expected, with stronger sales of branded products through the retail channel more than offsetting weaker sales in food service. However, AB Sugar has been affected by poor performance at the South African producer, Illovo.

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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 for more information.