ABF/Primark: fast fashion poised for quick recovery

Associated British Foods has the hallmarks of a post-crisis turnround. Shoppers have been queueing round the block to get into Primark, its fast fashion subsidiary, now UK stores have reopened. While they were shut, food-related assets helped the UK group generate a first-half profit, justifying payment of a dividend.

That shows the risk-limiting value of ABF’s derided conglomerate model. The shares dropped more than 4 per cent, even so. ABF typically gets half its sales and substantially more of its profits from Primark. The chain has revised down its expectations on store reopenings. 

Primark expects just 68 per cent of its retail space will have lifted the pandemic-imposed shutters by the end of the month, down from 83 per cent. It is taking a £21m charge — a drop in the inventory ocean but equivalent to half of divisional interim adjusted operating profit — to clear stock.

With fresh waves and mutations of the coronavirus, further lockdowns remain a possibility. These hurt Primark badly. It has no online channel to fall back on. Closures last year cost the business £3bn of sales and £1bn of operating profits. Consequently retail, which made up two-thirds of operating profit in the first half of last year, contributed just a tenth this time.

Sales of groceries and the like from other ABF divisions were up 30 per cent year on year in the first half. ABF was careful to caution that this strength will not persist. Commodity inflation coming down the line will damp volumes and trim margins in the back end of the year. Stronger sterling will also weigh, to the tune of £30m for the full year, reflecting the group’s increasing non-UK footprint.

Shares, which dipped after the announcement, are far from the lockdown lows of March and November last year. They still trade on multiples that are half peak levels, according to S&P Global. For all the inevitable wobbles, these are shares worth queueing up for.

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