Associated British Foods PLC (LSE:ABF) released a trading update today ahead of its half-year results that only further highlighted the importance of Primark to its performance.
Sales and profit are expected to be up 60% like-for-like for the fashion retail branch of the business and, perhaps even more impressively, they are expected to be ahead of pre-Covid levels, benefitting from six months of uninterrupted footfall in most of its stores globally.
It was also the only branch of the business that was able to navigate inflationary and supply chain issues without passing on the costs to the consumer.
In its full-year report last year, Primark accounted for more than a third of the total revenue, and nearly half of the operating profit, signifying the importance of the high street store to the London-listed company’s success.
But just how important is Primark to AB Foods?
Already the cheap option
Primark is renowned for its cheap clothing in comparison to some of its fast-fashion competitors such as Boohoo.
According to Dan Lane, a senior analyst at Freetrade, Primark is already the “discount option,” and that bodes well for AB Foods’, especially as the cost of living is rising, adding it would be wise to “double down on the appeal of its cheap, fast fashion outlets,”
“We’ll likely swap one basic commodity for another, if the purse strings tighten, depending on which is the cheapest. But Primark is already the discount option and the nation loves the marque for it,” Lane said.
Lane believes this gives it an edge over its competitors in the current market as the model won't have to change too much for Primark, "while other retailers might find themselves in a race to the bottom."
No website, no problem
A reason why Primark performed worse over the Covid period compared to other retailers was its lack of online presence.
The company has staunchly remained a high street store with no website, which, according to Russ Mould, an investment director at AJ Bell, may be a reason for the shares having “lost a lot of altitude since its peak back in late 2015.”
However, given the pandemic is seemingly behind us, footfall is expected to grow further which should see “consumption get back to pre-Covid levels,” according to Lane.
Neil Wilson, a market analyst at Markets.com believes Primark will be much “more important going forward,” which was reflected in today’s trading update as the stores benefitted from uninterrupted periods of business.
The benefits of releasing a non-transactional website will be put to the test this month as it prepares to launch in the UK.
Customers will be able to check the availability of products in-store, but not be able to purchase anything on the site.
It remains to be seen whether the costs involved in running and maintaining a website will be offset by an increase in sales as a direct result of the website.
Other areas are more competitive and cyclical
AB Foods isn’t just solely relying on Primark for growth and profit. It has branches of the business that deal with sugar, grocery and ingredients.
However, according to Mould, these areas are fiercely competitive and much more cyclical than the fashion retail sector.
Mould adds that its sugar business, in particular, “went through a difficult phase a few years ago but has rallied since.”
He said that “certain parts of grocery, such as bread, are fiercely competitive and will have their rough and smooth patches as a result.”
With its Primark business much more resistant to cyclical trends and competition in comparison, it is likely to “remain the jewel in AB Food’s crown,” said Lane.