Associated British Foods (ABF) expects the adjusted operating profit of its food business and Primark to exceed its expectation for the fourth quarter ending Sept. 18.
“Primark’s operating profit margin in the period was strong despite lower than expected sales,” ABF said in a statement.
Primark is expected to post sales of £3.4 billion in the second half of the financial year. The chain’s operating profit margin in the semester, before the charge for repayment of job retention scheme monies, benefited from a significant reduction in store labor costs and lower store operating costs and is expected to be over 10 percent. The full-year adjusted operating profit, before repayment of job retention funds, is now ahead of the profit delivered last year.
The repayment of the job retention funds received in the U.K., Ireland, Portugal, Czechia and Slovenia this year has been charged in the second half at 96 million pounds.
Like-for-like sales at Primark in the third quarter were 3 percent ahead of the comparable period two years ago, reflecting the “very strong trading” in the U.K. and in the European markets where stores had reopened. Sales reflected some pent-up demand with very high basket sizes.
However, sales in the fourth quarter were affected by changes in public health measures in Primark’s major markets to control the spread of the Covid-19 pandemic. “Trading in the fourth quarter varied considerably across the estate with a big impact in our major markets of the U.K. and Spain,” ABF said referring to Primark.
Primark has seen a “significant improvement” in trading as the last quarter progressed. For the fourth quarter as a whole, comparable sales are expected to be 17 percent lower than two years ago.
Data for the British clothing, footwear and accessories markets, which includes all channel and online sales, for the 12 weeks from May 31 to Aug. 22 showed that Primark had the same value share of the total market compared to the same period two years ago, according to ABF.
In Continental Europe, like-for-like sales were impacted by the performance of Primark stores in Spain and Portugal where the decline of foreign tourism caused by restrictions in international travel reduced the footfall. Like-for-like sales for both these markets showed a decline of over 30 percent for the fourth quarter compared to two years ago. In France, the introduction of a Covid-related pass (pass sanitaire) early August also led to a decline in the footfall.
In the U.S., comparable sales, excluding the Boston Downtown Crossing store which has been downsized, were up by 3 percent from two years ago. In contrast to Europe, the U.S. has had minimal public health restrictions.
The quarter saw a continuation of the trend for ‘comfort living’ with strong sales of leisurewear, ABF noted. “Sales of our autumn/winter ranges have started well and, as families look ahead to autumn, our back-to-school ranges started strongly,” it added.
Inventory cut due to supply chain disruption
Following the reopening of all Primark stores, inventory levels have returned to normal and all spring/summer inventory brought forward from last year has been sold and the autumn/winter inventory held over from last season will be sold in the coming months, it added. Primark is experiencing some delays for autumn/winter goods caused by port and container freight disruptions. The delays are expected to reduce the inventory at the year-end by some 200 million pounds compared to expectations with a corresponding increase in cash on hand, ABF pointed out.
Regarding the next financial year, Primark’s operating profit margin will continue to benefit from lower store labor and operating costs. It also expects that the effect on margins of supply chain and raw material inflation will be broadly mitigated by a weaker dollar.
Primark is scheduled to open a new store in the Fashion District of Philadelphia in the U.S. on Sept. 16 and expects to be trading from 398 stores and 16.9 million square feet of retail selling space, an increase of 0.7 million square feet over the previous year. Fifteen stores were added this year: four stores in the U.S., four in Spain, two in Italy and one each in France, the U.K., the Netherlands and Poland, as well as its first store in Czechia.
Covid-19 restrictions have held back Primark’s progress in developing a pipeline of new stores. “We are experiencing some difficulty in accessing and evaluating potential sites and in negotiating with potential landlords,” ABF said. In the next financial year, Primark is planning to add a net 0.5 million square feet in selling space, including four new stores in Italy, four in Spain and one store in each of the U.S., Czechia and Ireland. The retailer expects to see an acceleration in store openings in the coming years.
Primark is progressing in the design and development of a new digital platform, and the recruitment of talent to create a new digital capability is underway. A new website will be launched in the next calendar year. “Improved functionality will allow us to showcase a much larger proportion of the Primark range and to provide customers with range availability by store. We are also strengthening our digital marketing capability to enable us to deliver more personalized content to customers,” ABF explained.
