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AB Foods' Primark benefits from cheap offering but should consider online presence, analysts say

Analysts were impressed by the post-reopening results and see it as a defensive stock, but Primark still operates from bricks-and-mortar stores only

Associated British Foods PLC - AB Foods' Primark benefits from cheap offering but should consider online presence, analysts say

Associated British Foods PLC’s (LON:ABF) Primark impressed the market with its post-reopening trading.

Following the first stores resuming trading in May, nearly the whole estate is now up and running with sales reaching £133mln in the week to June 20.

READ: AB Foods quarterly sales fall 39% as Primark goes into and out of lockdown

In the UK and Ireland, revenue in that week was even ahead of the same period last week.

“There was pent-up demand and this will not be indicative of a normal week. Nonetheless, given the restrictions on customer numbers for social distancing, this represents a very strong performance,” Peel Hunt noted.

“We had expected sales for most retailers to be down 20-30% initially, reflecting some of the European and US re-openings such as Guess and Superdry, albeit the later had noted that the UK re-opening was the strongest territory to date.”

Following the £800mln cash burn during lockdown, the fast-fashion chain is expected to return to cash generation for the current quarter.

According to several analysts, this result shows the strength of the brand among consumers, as seen by huge, socially-distanced queues outside the shops.

In addition, the cheap and wide offering may remain very attractive in prolonged times of economic uncertainty.

The main demand has been for children’s, leisure, nightwear and summer products, with unsurprisingly weak demand for formal menswear and travel accessories, but it is unclear how it will hold up.

“There is a question mark over sales momentum, and whether the initial euphoria of renewed retail therapy will continue amid a period of economic recession and a potentially slow recovery,” said Richard Hunter at interactive investors.

Nonetheless, the FTSE 100-listed firm has placed orders worth over £800mln for the autumn/winter season and expects the total for the coming season to exceed £1bn.

Defensive but online platform needed

Although the wider group remains defensive with its diversified set of businesses and a strong cash pile, some experts suggest Primark implements an e-commerce strategy.

“Primark should rethink its bricks-and-mortar only strategy for the future, in order to mitigate the impact of reduced instore sales densities and capitalise on spend shifting online,” said Pippa Stephens, analyst at GlobalData.

Stores located in retail parks have seen more attendance, aided by parking and accessibility, but city centre locations have struggled due to a lack of tourism and fewer commuters.

“Despite some of its new store openings being delayed due to COVID-19, five new locations opened during the third quarter, with five more planned by the end of the year, but Primark must time these carefully, ensuring that consumer demand has sufficiently rebounded in these areas so that the openings are financially viable,” Stephens added.

Hunter said AB Foods is “hopefully” past the worst of the pandemic and there is ground to recover.

“AB Foods remains a well-regarded stock, with Primark being a key engine to growth and the market consensus of the shares as a buy should remain in place following the relief of the immediate outlook,” he concluded.

Shares were 5% higher to 2,071p at lunchtime on Thursday.

Quick facts: Associated British Foods PLC

Price: 1994.55 GBX

LSE:ABF
Market: LSE
Market Cap: £15.79 billion
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