Primark continues to be the shining light for AB Foods at a time when budgets are strained and inflation is still sky-high, which raises questions once again as to whether it should be spun off.
The apparel division of the FTSE 100 company is expected to announce operating profits ahead of previous guidance when full-year results are released sometime in November.
Indeed, AB Foods has been able to raise guidance, with adjusted operating profit and earnings per share expected to be broadly in line with last year, because of Primark’s success, which has benefitted from the chaos and uncertainty that has been the last three years.
Rewind to the start of the lockdowns in 2020, and Primark did not wilt under the pressure to create an online service, a decision from which it looks to be reaping the rewards.
Pent-up demand from consumers to return to physical stores meant high-street retailers benefitted while purely online players, ASOS and boohoo, are struggling to keep the balance sheets healthy amid a cost-of-living crisis.
Primark, too, has been a beneficiary of tightened consumer purse strings.
Selling items of clothing at the bottom end of the price range often means consumers trade down into Primark when times are tough, with inflation still above 10% and energy bills at the forefront of many households’ minds.
“Resilient spending at Primark could well reflect the company’s budget credentials, people trading down from more expensive chains and brands,” said Russ Mould, an investment director at AJ Bell.
Cheaper prices aren’t just useful to consumers in tough times, either, with the retailer performing especially well in the kids’ section, according to industry analysts.
Often when buying children’s clothing, parents will give greater significance to price over quality given the clothes will likely not fit in a year’s time, meaning if the parents are satisfied with the quality, Primark could have a repeat customer for some years.
Time to spin-off?
Anytime AB Foods reports, and Primark comes back a success, it raises questions as to what it is doing in AB Foods’ portfolio with mediocre performing grocery and sugar businesses.
Time and time again it is suggested that Primark be spun off and flourish as its own enterprise.
However, the bosses at AB Foods have always resisted the urge.
Why? AB Foods’ success is built on its diversity.
Selling food and clothing, business-to-business and direct-to-consumer is the main strength that leaves it fairly insulated from any macro factors, whether that be a deadly virus or war in Europe.
“One of ABF’s main strengths is a diversified business portfolio. This diversification helps to mitigate risk and ensures that the company isn’t overly reliant on any one particular product,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.
Take the lockdown for example, again. AB Foods’ decision not to spend millions in creating an online arm was likely influenced by its diversified portfolio, as its ingredient, agriculture, grocery and sugar divisions picked up the slack.
Annual results released in November 2020 for the year ended September prove this, as all four of its food-related reported an uptick in operating profits at a time when sales went dry in stores.
Spinning off a key part of what makes AB Foods a successful business wouldn’t be a smart move for anybody involved.