Shares in Associated British Foods (ABF) firmed up 0.5% to £19.44 after the FTSE 100 conglomerate said its Primark fashion business is trading ahead of expectations and with better margins as the firm faces into the most important selling period of the year.
In a short trading update ahead of its annual generating meeting, the foods-to-fashion giant also reiterated full-year guidance for ‘significant progress’ in adjusted operating profit and adjusted earnings per share.
PRIMARK POWERS AHEAD
While Associated British Foods’ grocery, ingredients and sugar businesses are struggling with port congestion and higher energy and freight costs, trading at Primark is ahead of expectations in the new financial year to date.
The discount clothing chain is seeing improved like-for-like sales growth and stronger-than-expected margins, whilst managing supply chain disruption by ‘prioritising products most in demand with the support of our logistics providers for whom we are a very important customer’.
Associated British Foods also insisted Primark has adequate stock for the important Christmas trading period, although Covid restrictions have impacted trading in Holland, Germany and Austria.
‘Looking ahead we currently expect Primark sales to be significantly better than sales in the comparable period in the last financial year, from December 2020 to April 2021, when the estate was largely closed,’ insisted Associated British Foods.
As Shares highlighted here, Primark smartened up its stores during lockdown downtime and is stepping up its digital presence.
The cut-price apparel retailer is also accelerating its selling space expansion across the US, where management recently insisted ‘the potential for new stores is considerable’, as well as France, Italy and Spain.
THE EXPERTS’ VIEW
Russ Mould, investment director at AJ Bell, commented: ‘Against a difficult backdrop, Associated British Foods looks to be doing its best to deal with supply and cost inflation issues.
‘Perhaps most important to its share price is the progress with Primark, where margins are better than expected and it seems confident on having enough stock for the important festive season.’
However, Mould added that there ‘remains a risk with tightening Covid measures which means that recent Primark success is perhaps not enough to trigger any upgrades to earnings forecasts’, with investors certainly ‘not bowled over by the trading update’ judging by the subdued share price reaction.
Shore Capital remarked: ‘Given the understandable concerns around the market about the scope for current external matters, particularly around the ongoing pandemic, to negatively influence ABF's trading performance, we welcome the content of this update.’
The broker added that ‘with an in-line performance ex-retail and Primark ahead of plan, there would appear to be reasonable prospects of upgrades down the line; we make this point because important December trade still needs to be navigated and coronavirus has a habit of remaining one step ahead of the policy makers.’
Shore Capital believes Primark remains ‘a powerful and great business that has growth ahead, whilst its digital journey is now more demonstrably moving in the right direction.’
Disclaimer: The author and editor of this story both own shares in AJ Bell Limited, owner and publisher of Shares magazine
