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Primark's US Expansion on Track

Latest update from Associated British Foods shows that its discount clothing business continues to prop up group sales

James Gard 4 July, 2019 | 10:31AM

Primark

Associated British Foods (ABF) has defied in the slowdown in the UK retail sector with a positive update on Primark’s sales and US expansion.

Sales at its discount clothes business were 4% ahead of 2018 in the 40 weeks to June 22. Primark’s US sales are growing, ABF said, and two planned store openings in New Jersey and Florida will happen by the end of the year.

“Primark’s expansion in the US appears to be going well. This is a major positive given how British retailers have notoriously struggled to crack the American market,” says AJ Bell’s investment director Ross Mould.

“Primark’s low value point should work in its favour in the US, particularly as more middle-income consumers in the country now shop at discounters and budget stores.”

Still, the FTSE 100 firm – in keeping with other consumer-focused firms – said clothing sales were affected by wetter and colder weather in May but this was helped by a return to more seasonal conditions in June. In the Eurozone, sales rose in Southern Europe but trading continued to be weak in Germany.

Primark Outperforms Again

Primark’s outperformance in recent years has helped the firm cushion weakness from other areas of the diversified business, which includes sugar, grocery brands such as Twinings and Ovaltine and agriculture. Primark now makes up 50% of group sales and more than 60% of pre-tax profits.

Ed Monk, associate director of Fidelity Personal Investing, says that Primark has followed an old-fashioned formula of increasing stores and lowering prices in defiance of the growing trend for online sales.

“It has stuck with a bricks and mortar expansion plan as the rest of the High Street goes for online, and it has been singled out for criticism over fast fashion sales, but its customers don’t appear to care about any of that.”

Sugar has been a known drag on group revenue in profit in recent years. In the reporting period, group sales were up 2% at actual exchange rates – excluding sugar, sales growth was 4% higher. The end of European Union production quotas has exposed companies to global market forces, where prices and profits have been falling in recent years.

According to Morningstar retail analyst Ioannis Pontikis, says Associated British Food’s shares are now close to being fairly valued after a strong performance this year. Pontikis argues that, despite strong growth from “crown jewel” Primark: “We expect that intense competition and limited differentiation opportunities will conspire to limit Associated British Food’s long-term earnings growth potential”. Associated has a “no moat” rating, which means that it does not have sustainable competitive advantages.

Morningstar assigns a three-star rating to ABF and a fair vale estimate of £26.60, above the current price of £24.51. Since 2000 when shares were around 330p, they hit a record high in 2015 above £35, making ABF a rare “10-bagger”, a firm whose shares have gone by 1,000%.

 

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Associated British Foods PLC2,458.00 GBX0.90

About Author

James Gard  is content editor for Morningstar.co.uk

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