Retail has struggled over the coronavirus pandemic, but can consumer spending turn the tide as stores reopen?
Primark owner takes hit during lockdown
- Majority of fall in sales witnessed by the group can be attributed to closure of Primark stores, where sales fell by 75% over the quarter
- Cash outflows were also substantial, leaking £800mn during a 12 week period from March to May
- Investors welcome other business lines coming to the rescue, as Agriculture, Sugar, Grocery and Ingredients businesses collectively saw increased demand
- Recommendation: We maintain our cautious ‘Hold’ but investors who bought in because of Primark’s previous growth record will be kicking themselves as they see rivals such as Boohoo and ASOS march on
In this environment diversification is proving to be a key asset for many companies such as ABF. While their clothing business was all but shut during the lockdown period, their foods and groceries business helped mitigate the damage. For the 40 weeks to the 20th of June, group sales dropped by 13% and the last quarter saw sales fall by 39%. Pretty much all of the decline was as a result of the closure of the Primark stores where sales fell by 75% during the quarter. Cash outflows from the retail unit were substantial, leaking £800m during a 12 week period from March to May. The group honoured payments to suppliers for orders prior to 17 April but also cut its operating expenses by 50% to limit the outflow to £100m a month while stores remained closed. However, the group lost sales of £650m a month and management must surely be considering how different the situation could have been if they had an online store to channel their sales through. Since reopening, sales seemed to have been pretty good, but we question how much of this is just pent up spending needs and whether, once this is satisfied, consumers will still be heading to physical stores in big numbers given that the virus has not disappeared.
Investors will be pretty happy that its other businesses have come to the rescue and helped mitigate the damage. Collectively, the Agriculture, Sugar, Grocery and Ingredients businesses all saw increased demand, especially Groceries where sales rose by 9% and retail spending more than made up for the loss in sales from the food services sector. These businesses are expected to trade well for the remainder of the year and this encouraging outlook has lifted the shares by over 7% this morning. However, the Primark unit is expected to see profits plunge by two thirds to between £300m-£350m.
While this trading update is relatively encouraging,, the shares have a long way to go to get back to the pre-crisis levels. Most of this will be explained by the fear surrounding its once prized asset Primark; without an online sales channel it could end up being a liability if lockdowns become a regular occurrence as the virus spreads in waves. Investors who bought the shares because of Primark’s previous growth record will be kicking themselves as they see rivals such as Boohoo and ASOS march on. We remain with our cautious Hold recommendation on the shares.
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