Primark powers ahead, UK, Europe and US all drive over-performance

Champagne corks are likely to be popping at Primark owner Associated British Foods when it delivers its full-year results in a couple of months time. Why? The company delivered a full-year and Q4 update Monday and said that results have proved to be even better than it had expected.


There are challenges, of course, but overall the Primark brand appears to be very strong and is progressing well.

Let’s set the scene: Back on July 6, the company said that it was looking forward to a better full-year underlying operating profit as Primark had outperformed during Q3. Whiz forward to Monday and it seems Primark accelerated during Q4 (which doesn’t officially end until this coming Saturday) and with “an even lower level of markdown” that it had planned for, adjusted operating profit for the group “will be well ahead of last year.”

While operating profit in some other parts of its business isn’t expected to be quite as good as at Primark, the performance of its value-focused retail chain is more than enough to make up for any shortfalls elsewhere.


So what are the numbers? On a comparable-week basis, sales at Primark for the full year are expected to be 13% ahead of last year currency-neutral, driven by increased retail selling space and an admittedly-small 1% growth in comparable sales. But given that Primark is almost unique in not offering its products for sale via e-commerce - the biggest growth area in modern fashion retail - that’s pretty impressive. 

And if you take the same results at actual exchange rates, sales are expected to be 20% ahead. That makes it clear that currency shifts really are working in the firm’s favour at the moment.

With some two-thirds of the group's operating profit earned outside the UK, the devaluation of the pound since June last year will result in a translation benefit of some £85m this financial year, most of which arose in the first three fiscal quarters. That said, the pound’s weakness has hurt ABF when it comes to Primark's largely dollar denominated purchases this year (more of that later).

Looking at sales, Primark has performed “particularly well in the UK” where full-year sales are expected to be 10% ahead of last year on a comparable basis and its share of the total clothing market “has increased significantly”. After a good first half, Q3 trading was particularly strong in the lead up to Easter, benefitting from easier comparisons a year earlier that had been affected by poor weather and an earlier Easter holiday. Favourable weather as it moved into Q4 and a strong product offer meant lower markdowns, while early trading of the new autumn/winter range has been “encouraging”.

The company said it continues to expand in the US and is “fine tuning” its ranges there. It opened three stores during the year and extended the Downtown Crossing store in Boston by 20% increasing it to 92,000 sq ft. Its ninth store is scheduled to open next year in Brooklyn, New York.


In fact, Primark is upping its store count in all of its markets and added 30 new stores and 1.5 million sq ft of space in nine countries in the latest year. It now has 345 stores with 11 added in the UK; three in each of Spain, France, the Netherlands, Italy and the US; two in Germany and one each in Belgium and Ireland. Its UK flagship store at Oxford Street East was extended by 40% during the year, increasing it to 114,000 sq ft. 

And in the next financial year it’s planning over 1.2 million sq ft of additional selling space. France, Germany and the UK will see the most space added and overall it will open 19 new stores, together with a number of relocations and extensions. The larger stores will be in Stuttgart and Munich in Germany; Toulouse and Bordeaux in France; and Antwerp in Belgium. 


The company also said that while the first half operating profit margin of 10% declined from 11.7% a year ago, reflecting the strength of the US dollar on input costs, the second half has been better. That’s certainly an impressive achievement given that currency hedges ran out during H2 and new ones were at less advantageous rates. And with the benefit of “input margin mitigation and lower markdowns” it now expects the full-year margin to be better than the first half.

But with most of next year's first-half UK purchases contracted at the weaker sterling/US dollar exchange rate than the same period last year, there will be an adverse effect on margin in the first half of the year that starts later this month. 


However, the strengthening of the euro against the US dollar in recent months will have a beneficial transaction effect on Primark's eurozone margins particularly in H2 next year if these rates continue. And with some cost increases and markdowns returning to a more typical level, the company expects full-year margins to be similar to this year.

So with similar margins and more stores, can we expect to see another powerful full-year update this time next year? Much of that depends on the global economy and other issues beyond its control such as the weather. But Primark is clearly getting it right at present. And even if consumers feel they need to tighten their pursestrings or don’t want to spend as much on coats/boots/bikinis/sandals because the weather isn’t playing ball, Primark’s value pricing is likely to mean it suffers less than some its peers.

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