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AB Foods expects £1bn loss if Primark closures continue to next month

The fast-fashion retailer does not have an e-commerce platform so cannot compensate for the lack of sales during lockdown

Associated British Foods PLC - AB Foods expects £1bn loss if Primark closures continue to next month

Associated British Foods PLC (LON:ABF) said it expects to lose £1.05bn if the Primark stores currently closed remain shuttered until the group's financial half-year end on February 27, 2021.

As a result, the adjusted operating profit for Primark in the first half is forecast to be broadly break-even, compared to £441mln for the same period last year, while the group’s net cash before lease liabilities is expected to be around £500mln.

READ: AB Foods rings out the old year with an unseasonal update, warning of bigger lockdown impacts

The FTSE 100 firm said it will partially mitigate the loss of sales by delivering savings of 25% of the operating costs of those stores that are closed.

Under the scenario that the entire estate is closed imminently, and remains closed until the end of March, the further loss of Primark sales would amount to £800mln, with a consequent hit on profits of £300mln.

At the moment, 305 Primark sites are not allowed to trade due to the coronavirus (COVID-19) restrictions, representing 76% of the group’s retail selling space.

In the 16 weeks to January 2, 2021, sales in the fast-fashion brand plunged 30% for a hit to profits of £540mln, while Primark does not have an e-commerce platform to offset the losses amid global restrictions.

Where stores were open, sales shed 14% on a like-for-like basis, with customers preferring retail parks rather than high street and city centre locations.

Sales were strong in those stores open during the festive season, with all Christmas and gifting lines sold out in several sites, while the ‘stay at home’ product categories also performed well.

However, the level of markdown was substantially lower than the same period last year and the company plans to warehouse some £200mln of autumn/winter stock for later this year.

Although COVID-19 has delayed some store openings, the firm still plans to add a net 700,000 square feet of additional selling space across Europe in this financial year.

Better performance in other divisions

AB Foods' other divisions performed better in the 16 weeks to January 2, 2020, with revenue across all food segments advancing 7% to £2.7bn, although it couldn’t offset Primark losses so group revenue tumbled by 13% to £4.8bn.

Grocery rose 7% with particularly strong growth in Twinings Ovaltine and the group's UK Grocery businesses, which had the benefit of higher sales to international customers ahead of the deadline for the end of the Brexit transition period and continued higher volumes in retail grocery as people spent more time at home during lockdown.

Sugar jumped 6% thanks to higher average sugar prices for British Sugar, combined with record bioethanol prices in recent months, and higher sugar prices in Illovo, with operating profits estimated to be well ahead of last year.

Revenues in Agriculture and Ingredients were 10% and 3% higher than last year respectively.

"In many ways Primark has been resting on its laurels and its huge fan base of shoppers, hooked into its social media channels, who have flocked back through the doors when restrictions have eased. But the fresh spike of infection rates, caused by the new infectious strain have brought a whole new level of uncertainty," said Susannah Streeter, analyst at Hargreaves Lansdown.

"It’s unclear when stores will be able to reopen and loyal customers who may have held out on purchases waiting for business as usual to resume, may be tempted to test the water with rivals online."

"Whether this shock to the system will lead the retailer to re-visit an e-commerce trial remains in question. The high cost of returns are  thought to be one of the reasons its resisted making the investment, so far. But at ASOS returns have fallen during the pandemic. The way fashion followers shop has changed dramatically over recent years, and Primark now risks finding itself behind the curve," she added.

Shares in AB Foods dipped 1% to 2,205p on Thursday morning.

-- Adds analyst comment, share price --

Quick facts: Associated British Foods PLC

Price: 2249 GBX

LSE:ABF
Market: LSE
Market Cap: £17.8 billion
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