Portfolio

ABF considers stock building to counter Coronavirus risk to supplies

By Frank Prenesti

Date: Monday 24 Feb 2020

(Sharecast News) - Primark owner Associated British Foods said it was looking at stepping up production from Asian suppliers as it warned of risks to supplies from China due to the Coronavirus.
First half sales at Primark were expected to be 4.2% ahead of last year on a constant currency basis and 2.5% ahead at actual exchange rates, driven by increased retail selling space and level like-for-like sales, ABF said, adding that it maintained full year guidance with progress expected, in adjusted earnings per share.

The company said it was "well stocked" with inventory having built up supplies ahead of the Chinese new year and did not expect any short-term impact from the Coronavirus which has now spread worldwide, but warned that prolonged delays to production posed a risk.

"We are working closely with our suppliers in China to assess the impact on their factories and supply chains and their ability to fulfil our current orders," the company said on Monday in a trading update.

"With the expected decline in margin, operating profit is expected to be marginally down on last year at constant currency and on a lease-adjusted basis. On a reported basis operating profit will be ahead of last year," it said.

"Primark sources a broad assortment of its product from China ... we are assessing mitigating strategies, including a step up in production from existing suppliers in other regions."

ABF said several of its food businesses had operations in China, adding that its sugar campaign in that country was completed in January before the coronavirus outbreak developed significantly.

The group said its AB Mauri, AB Agri and Ovaltine factories were operating, but at reduced capacity due to labour and logistics constraints.

Clothing and footwear sales in the UK were "particularly good" over November and December but weakened in January and February against very strong comparatives in the prior year.

"Sales are expected to be 3% ahead of last year, driven by a strong contribution from new selling space partially offset by a 1.3% decline in like-for-like sales," ABF said.

ABF said its business in the US continued to perform strongly, delivering like-for-like sales growth, with particularly strong trading at the store in Brooklyn.

"Together with the contribution from the planned store openings at American Dream, New Jersey and Sawgrass Mills, Florida, we expect a much-improved operating result for the year," it said.

Hargreaves Lansdown analyst Sophie Lund-Yates said news of continued progress in the group's US operations will have been well received.

"Primark can only grow so big in the smaller UK market, making international success increasingly important. Back on home turf, Primark is still seeing sales move in the right direction, despite a reduction in the number of like-for-like visits. New sales space is to thank for the positive trend, and flies in the face of other large retailers struggling with weak high street trading, who are being forced to close stores," she said.

"Overall Primark continues to buck the bleak high street trend. Coronavirus is a potential headwind, but as a dynamic situation it's too early to say how things will turn out."

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