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Home / Blog / blog / Company Focus || Sale rail for bargain fashion brand? || 24-4-20

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Company Focus || Sale rail for bargain fashion brand? || 24-4-20

Primark owner, Associated British Foods, saw its share price reduced by as much as six per cent this week, as coronavirus continued to hit its budget fashion brand hard.

Shares in AB Foods are now standing at 1,879p at the time of writing and the firm has announced it will cancel its interim dividend. In a statement, which also detailed the deaths of two of the company’s Italian employees from coronavirus, Chief Executive, George Weston said: “In time we can rebuild the profits. We can’t replace the people we lose.”

All 376 Primark stores around the world have been closed since late March, losing approximately £650m per month of sales. AB Foods sugar and grocery businesses have continued to operate throughout the pandemic, but they are facing operational challenges as demand increases.

So, can AB Foods recover or does the closure of its bargain brand stores spell the sale rail for its stock?

The group’s first-half results, up until the end of February, were positive showing a revenue lift of two per cent to £7.65bn and its adjusted profit before tax was up three per cent to £636bn. The closure of Primark stores has delivered a big hit though, especially as AB Foods agreed to pay for all stock in transit, estimated to be worth £600m, and it has committed to paying Asian suppliers £370m after an initial backlash when it refused to pay out.

The group was in a relatively strong cash position before coronavirus hit though, with net cash of £801m and at the end of March it drew down its revolving cash facility of £1.08bn. It has also stated that it intends to try and access Government schemes to fund employee wages and coupled with business rates relief, it expects recover around half of Primark’s operating costs.

While the sugar and grocery arms of AB Foods, which include Allied Bakeries and Speedibake, have so far been unaffected by the pandemic, Primark does make up over 60 per cent of its group operating profit.

Analysts are still generally optimistic about the group’s prospects but some are wary about how things could pan out if the pandemic drags on too long. Primark has always had a minimal online presence, meaning its completely reliant on its bricks and mortar stores and Hargreaves Lansdowne pointed out that heavy discounting of its surplus stock when stores reopen will hurt margins. The analysts said: “Primark’s inventory levels initially swelled because of the disruption, meaning it’s sitting on £1.5bn worth of unsellable stock. The group could decide to plaster sale stickers on items to sell them quickly, which hurts margins. “

Having said that, Hargreaves Lansdowne did go on to describe AB Foods as “one of the better placed names in the retail sector.”, and Shore Capital agreed saying: “We see Primark as an undoubted fixture of apparel retailing in the future when casualties sadly abound around the world.”

Liberium were also optimistic, pointing out that the group’s half year results were solid, and it had strong liquidity.

Whether or not Primark can regain its frugal fashion favourite status, and keep AB Foods in the black, probably depends on how long lockdown lasts but currently analysts are not too concerned and most have retained ‘buy’ or ‘hold’ ratings.

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