Primark’s performance was once again out of the top drawer in a third-quarter trading update from conglomerate Associated British Foods plc (LON:ABF), with the discount clothing stores doing particularly well in the UK, but also seeing good traction in North America.
AB Foods said sales at Primark in the year to date were 13% ahead of last year at constant currency driven by increased retail selling space and growth in like-for-like sales.
READ: AB Foods shares jump as underlying trading ahead of forecasts thanks to strong performance from Primark
At actual exchange rates, the group added, Primark’s sales continued to benefit from sterling weakness and are 21% ahead in the year to date.
AB Foods also said Primark performed particularly well in the UK where year to date sales were 9% ahead of last year and it continues to increase its share of the total clothing market.
Independent retail analyst Nick Bubb said: “Today’s trading update from the sprawling conglomerate ABF is upbeat about the ‘jewel in its crown’, namely mighty Primark.”
He noted: “The core UK Primark business has seen sales growth accelerate from 7% in the 24 weeks to 4 March (which was +2% LFL), to 9% in the 40 weeks to June 24, implying very strong trading over the last 16 weeks, boosted by strong Easter trading.”
The analyst added: “Further afield, ABF flag that early trading at the new Primark stores in Florence in Italy and at Staten Island in New York and South Shore in Massachusetts in the US has been particularly good.”
In its update, AB Foods said the third quarter was another active period for store openings, with 10 new premises opened in total - in Uxbridge and Llandudno in the UK; Granada and Tarragona in Spain; Charleroi in Belgium; Zwolle and Hilversum in the Netherlands; Florence in Italy; and Staten Island, New York and South Shore, Massachusetts in the US.
Nicholas Hyett, equity analyst at Hargreaves Lansdown said: “Primark’s North American expansion finally seems to be gathering a head of steam too, with the two new US stores opened this quarter trading particularly well.”
Margins being hit, but action taken
Hyett added: “Currency headwinds may be hitting margins, but Primark’s disposable fashion at amazing prices remains popular with shoppers across Europe, with sales growth many high street retailers would kill for.”
Operating profit margins at Primark were a focus after the retail chain saw a decline to 10% in the first half of the current year, down from 11.7% a year earlier, which AB Foods said reflected the strength of the US dollar on input costs.
However, the group said today that with the benefit of improved input margin mitigation and lower markdowns, it now expects Primark’s full year margin and the rate of decline to be in line with the first half.
Russ Mould, investment director at AJ Bell said: “AB Foods also suggested that profit margins could come in higher than suggested at the first-half stage, owing to strong sales, cost-cutting and lower markdowns at Primark, to underpin analysts’ forecasts for a healthy increase in earnings this year:
He added: “This all suggests that Primark’s keenly-priced, fast fashion continues to chime with shoppers at a time when wage growth is sluggish and the economy far from firing on all cylinders.”
ABF’s other businesses “rather idiosyncratic”
Aside from Primark, AB Foods also has a grocery business – which includes Twinings tea, Ovaltine drinks, Dorset Cereals, and Kingsmill bread – and a Sugar operation.
Hargreaves’ Hyett said: “ABF’s other businesses are rather idiosyncratic, but the Sugar business at least has significant scale and has been putting in a better performance as sugar prices have recovered after a period in the doldrums.
“Early noises suggest volumes will rise next year, with the division continuing to sweeten results.”
With all its many parts putting in good third quarter performances, AB Foods shares topped the blue chip leader board in late morning trading, up 3.7%, or 107p to 3,029p.
Huge premium, but shares no longer look outlandish
AJ Bell’s Mould said: “AB Foods shares peaked at £36 in December 2015, when analysts were forecasting earnings per share of 100p for the year ahead – a price/earnings multiple of 36 times.
“The shares have since pulled back to £30.50 – yet consensus earnings per share forecasts are now 122p for this year and 133p for next, to put the stock on 25 times and 23 times, a huge de-rating.”
He added: “This is still a huge premium to the UK market, which trades on around 15 times for 2017 and investors must decide whether AB Foods’ growth potential, and the reliability of the forecasts, justify that premium.
“But in a period when Western economic growth is struggling to accelerate beyond 2% any firm that offers consistent earnings increases is likely to be highly prized and AB Foods’ current rating at least no longer looks outlandish relative to its own history.”