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Associated British Foods Trading Update – What The Analysts Said

Associated British Foods has said that trading in the fourth quarter of its financial year 'exceeded expectations', with its Primark, Grocery and Sugar operations all putting in a strong performance.

'For the full year we expect a very strong increase in the aggregate adjusted operating profit for our Sugar, Grocery, Agriculture and Ingredients businesses over last year,' the company said in a trading update ahead of the publication of its full-year results on 3 November.

Here's how industry analysts viewed its performance:

Russ Mould, AJ Bell

“A key takeaway from Primark-owner Associated British Foods’ latest update is the disproportionate impact the current crisis appears to be having on major cities and particularly city centres.

“Take out just four of Primark’s store estate – all of them destination city centre sites – and the company’s sales performance since lockdown ended would have gone from creditable to highly impressive in the circumstances.

“Primark needs a measure of normality to do well. Its low ticket business model is not a proposition that seems likely to translate well to the internet and the company has not gone down this route, not even considering it at the height of the coronavirus restrictions.

“A return to nationwide lockdown or just more restrictive measures would significantly undermine the recent sales momentum.

“In the coming months and years there are two counteracting forces to watch that could influence performance.

“In a recession people often trade down, ditching more expensive brands and products and reaching for a bargain alternative – this could increase the size of Primark’s customer base.

“The flipside is a growing awareness of the social and environmental cost of cheap clothing – such ethical concerns seem particularly important to younger people and bring with them the risk of pressure from investors and regulators.

“In the company’s defence, it has made strides tackling these issues, but some people will remain sceptical that it can sell its clothes so cheaply just by being efficient, not advertising too much, buying in bulk and avoiding expensive hangers, tags and labels.”

Darren Shirley, Shore Capital

"Overall, we see today’s update as a positive from ABF, and are encouraged by what appears to be across-the-board momentum through Q4. We expect to nudge up our FY2020 expectations, and also place our FY2021 forecast under review for upward revision.

"Indeed, the performance of Primark to the FY2020 year-end is highly encouraging in our view, particularly given its store-based nature. In the face of enormous challenges, the fact that Primark is one of the few high street names where there are consistently queues to enter its stores (under social distancing rules) is a real testimony to the strength of the brand and all that goes into making it so potent.

"More so, that Primark is holding its own against the whole UK apparel industry, online and offline, augurs particularly well given the undoubted offline capacity contraction. Primark is not only going to be a survivor of the high street but an ongoing winner. Indeed, as stated, we believe the estate remains highly immature and that the geographic expansion of Primark still has many years to run, the USA alone remains a real opportunity for sustained growth potential for its parent.

Cathal Kenny and Katy Hutchinson, Davy

"Associated British Foods’ (ABF) full-year pre-close trading update points to a better-than-expected performance in Primark through July and August, prompting management to adjust its Retail profit guidance to at least the top end of the £300 million to £350 million range.

"ABF’s operationally diversified structure serves it well in this environment – its non-Retail divisions are expected to deliver “very strong” profit growth year-on-year (yoy), driven by Grocery gains and a material improvement in Sugar. Group cash generation was materially ahead of expectations. Today’s statement is evidence of a sustained recovery at Primark and associated franchise value."

Pippa Stephens, GlobalData

"Despite being one of the worst hit fashion retailers during the peak of COVID-19 due to its lack of a transactional website, Primark has exhibited impressive resilience, with trading exceeding expectations since its stores began to reopen in May. The retailer’s value proposition and wide appeal product ranges led to pent up demand while its stores were closed, with long queues being experienced outside many of its locations upon reopening.

Though adjusted operating profit for the financial year will understandably come in significantly lower than FY2018/19, this is now anticipated to be at the top end of the £300-350m range previously estimated in July, as higher basket sizes have helped it to counteract the impact of reduced footfall.

"While there has been increased discounting at many of its fashion competitors, Primark has also managed to minimise markdowns during the period, enabling it to remain more profitable.

"Primark’s retail channels have experienced ongoing disparity since stores reopened, with city centre locations dragging down its top line sales across all regions due to a decline in tourism and commuters. Though in the UK, the government is now encouraging the public to return to work and make non-essential travel journeys again, consumers are still likely to refrain from visiting these busy areas for some time, leading to a long-term decline in footfall."

© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.

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