I tagged Associated British Foods (LSE: ABF) as one of three companies I wanted to keep an eye on in November, as full-year results were due (and delivered) on 5 November.
I like the defensive nature of the company’s various food businesses, which don’t depend on whether we’re inside or outside the European Union. But the real measure of ABF for me and, I think, a strong indicator of the UK’s core retail health, is Primark.
As hoped, Primark delivered the goods once again, with chief executive George Weston speaking of “strong profit growth from Grocery and Primark which more than offset the profit decline in Sugar.”
50 years
In the year that marked the 50th anniversary of the opening of the first store, Primark made its first move into Eastern Europe with a store in Slovenia – and I can’t help smiling at the thought of a UK company supplying cheap clothes to Eastern Europe. Stores in the US “performed very well” and there are plans to open four more there in the near future.
I don’t want to duplicate the breakdown of the ABF figures provided by my colleague G A Chester on the day of the results announcement, so please head there for more details, but I do want to cast a quick eye over some of Primark’s numbers.
Revenue rose by 4.2% at actual exchange rates, thanks to increased selling space. Like-for-like sales dipped 2%, but I see that as a pretty decent performance against the background of the high street woes that are hitting so many other clothing retailers. And in what strikes me as a great result, operating margins increased from 11.3% to 11.7%, providing an 8% boost to adjusted operating profit.
Doing well
Why is Primark doing so well when so many others are struggling? I think it’s important to not see the retail clothing business as a single unified one, because it very much isn’t. The fashion end of the market is risky, and relies entirely on discretionary spending (of often quite significant sums of money). When purses and pockets are squeezed, shoppers can easily turn away without any real harm to their well-being.
But, economic downturn or not, we still need clean undies and socks without holes, and that’s the staples end of the market that Primark covers so well. I’m perhaps not a typical example of a clothing shopper – I could wear expensive clothes and still make it look like I shopped at Primark – but I get lots of basics there, and the place is always crowded when I visit.
Brexit
What of the post-EU outlook? Well, the firm told us that “food production is, wherever possible, aligned with the end market” and that Primark “operates largely discrete supply chains for its stores in each of the UK, US and EU27.” What that means is that “the group undertakes relatively little cross-border trading between the UK and the rest of the EU.”
The shares might not look a screaming bargain on forward price-to-earnings multiples of 15–17 and with dividend yields modest at around 2%. But with the price significantly below its 52-week high, I reckon Associated British Foods is a buy.