Will Primark Continue to be a Feather in ABF’s Cap?
This year’s unprecedented COVID-19 crisis has had a significant impact on UK clothing and food industry with clothing stocks such as Marks and Spencer’s as well as Next losing nearly half of their value in the last 30 days. ABF, a close third, has seen a 36% drop in its share price. To give you some context, in comparison, the FTSE 100 index has lost around 30% of its value in the last 1 month. A possible explanation for ABF having taken less of a thumping could be due to investor faith in the uplifting performance of its sugar, grocery, ingredients and agricultural businesses; in particular, its successful sugar subsidiary — the rise in EU prices and improvements in cost reduction have indeed benefited British Sugar.
The pandemic itself has affected clothing retailers globally, and with governments taking measures to protect their people, hundreds of stores have temporarily pulled down their shutters as nations take to the much required stricter measures to self-isolate and enforce lockdowns — difficult but necessary call if we have to choose saving lives over livelihoods. Anyone reading the tea leaves can see that this might push many business off the financial cliff. Even though governments are initiating a number of COVET 19 business interruption schemes, this will definitely have an impact on clothing retail earnings, as rent expense per outlet remains a huge outgoing with hardly any revenues. However, many companies’ clothing retail divisions have a crutch to lean on — their eCommerce (online shopping) division. With retail shopping now moving online, UK clothing retail divisions of Marks and Spencer, Next, Tesco and Sainsbury’s can and must focus on backing, cementing and propelling their online shopping departments. Amazon for example, has added 100,000 employees to its entire online shopping department to cope with the surge in demand. Walmart has luckily revamped its struggling online shopping division over the last 6 years, having invested heavily (around $5 bn per year since 2014) in enhancing its eCommerce, payment apps, pickups and delivery. In 2018, Walmart even surpassed Apple to become the third largest online retailer in the United States.
If there’s one thing that the COVID-19 crisis has told us about ABF’s Primark in particular, it is that, they may not have been dealt their worst hand yet — this crisis should serve as a wake-up call for ABF — an alert that Primark’s absence from the eCommerce online platform may force them towards a ventilator. Although many retailers are now spending on enhancing eCommerce technology, Primark seems to have expanded its presence to a total estate of 376 stores worldwide. There is nothing wrong with this approach, but for a company which contributes around 50% towards its group’s annual revenues, this choice of investment may push them to the edge of the financial cliff.
As a whole, the group has a strong balance sheet, with substantial cash of around £800m and a revolving credit facility of £1.1 bn. Even though operating profits for the group as a whole have shown a steady increase, in the long run, I wonder if ABF can continue to rely on Primark to perform at the same level as its other subsidiaries, especially without an investment in eCommerce. Primark may become ABF’s Achilles heel in a few years. The age of digitalisation has been here a while — Primark isn’t there yet.
This article is purely my opinion and does not represent the opinions of any person, group or firm
