MIDAS SHARE TIPS: Want profits to rise? Put an ingredient like baking giant Associated British Foods in your mix of investments
We’re constantly told that shops in these tricky times can only succeed by selling online. But there’s one notable exception that insists on the in-store experience.
Primark – known by many as Primani because of its ability to ape designer trends at cheap prices – has long delighted its fans with cut-price loungewear, lingerie staples and Harry-Potter-themed onesies. The only snag is that customers can’t have the products delivered, and must visit the store instead.
This quirk meant lockdown was very far from wizard for Primark. But this week’s trading update from parent company Associated British Foods showed the chain hasn’t lost its shine.
Sweet success: Home baking is helping ABF’s Silver Spoon sugar brand
Ever since shoppers have been allowed to return they’ve put more into the ‘average basket’ – probably because once you’ve queued for an hour to get into the shop, you aren’t going to restrict yourself to a six pack of tights and a 99p mascara.
And, as the name suggests, Associated British Foods is about far more than discount clothing. The company also owns iconic brands such as Twinings Tea, Ovaltine, Kingsmill bread and Silver Spoon sugar.
Where Primark suffered when we all stayed home, the rest of the business thrived on a new world of comfort eating and competitive baking, and a rise in the EU sugar price.
As we emerge, blinking, from what pessimists are already calling Lockdown I, AB Foods is in a reasonable, albeit unexpected position. While earnings per share are significantly below last year thanks to lockdown, better-thanexpected performance from the grocery and sugar businesses has helped sweeten the pill.
For the full year, which finished yesterday, analysts are pencilling in over £100million more profit from the food business than the same time in 2019, compensating somewhat for store closures.
AB Foods shares rose initially after analysts digested the company’s trading update this week.
The figures were better than indications given earlier in the summer, which encouraged many brokers to upgrade their stances on the stock.
However, shares have since fallen as investors mull the possible impact of a ‘second wave’ of coronavirus on non-essential retailers, as well as general winter and Christmas pessimism after Boris Johnson’s Rule of Six briefing on Wednesday.
There may be fewer Christmas parties to buy sparkly dresses for this winter, but there’s still time for fast-moving Primark to move its focus to snuggly loungewear and work from home staples, while the trends driving out-performance in the grocery arena look set to continue.
AB Foods’ statement on Brexit was also reassuring. Longstanding finance director John Bason said all the company’s businesses were prepared in the event of No Deal.
He also informed the market that the company has now developed a ‘flexible set of responses’ for further Covid-19 restrictions and are ‘ready to deploy these as required’.
Primark fans are no doubt hoping this is a long-awaited e-commerce strategy. But, given Bason’s previous comments on the costs of online selling, a winter of queuing in the sleet and snow to buy Slytherin onesies looks more likely.
Midas Verdict: In the 1990s, Primark rose from AB Foods’ Cinderella retail business to become the company’s profitable postergirl.
Now that nobody can go to the ball she’s been eclipsed by the less glamorous food businesses. As we make our way towards the much-vaunted ‘new normal’, the hope is that both can thrive.
As a well-managed business with plenty of cash and a track record of predicting consumer demand, super affordable Primark is more likely than most to keep its customers in a recession, while the groceries business should benefit from a stay-at-home winter.
Closing at £19.39 on Friday, AB Foods shares trade on almost 17 forward earnings, with a dividend yield of 2.4 per cent.
Positive news in early November could push them higher. They might be less affordable than a Harry Potter cushion but they’re still worth queuing up for.
Traded on: Main market Ticker: ABF Contact: abf.co.uk or 020 7399 6500