Associated British Foods PLC stays cautious on outlook but analysts are bullish

() expressed caution in its interim results but the City remains bullish on Primark’s ability to rebound after months of closures.

In fact, the fast-fashion retailer delivered record sales in the first week after reopening in England and Wales.

The performance was driven not only by increased basket sizes, as seen after previous lockdowns, but also by an improvement in footfall.

People shopped for essentials in the nightwear, lingerie and leisurewear ranges but there was huge demand for fashion lines, particularly in womenswear, as consumers are rebuilding their wardrobe ahead of a summer of freedom.

The chain doesn’t have an e-commerce platform and resisted the temptation of building one from scratch during the pandemic, arguing it would have caused an increase in its famously cheap prices.

“Big queues formed outside Primark stores as they opened their doors following the reopening of non-essential retail in England on 12 April… Primark clearly has brand loyalty and serves a cost conscious market which is keen to get out to the shops and see and feel items of clothing before making a purchase,” said AJ Bell investment director Russ Mould.

“Now Primark stands to benefit from a less crowded market on the high street and is likely to continue its strategy of opening up stores in areas where it has less penetration in the US and Europe.”

AB Foods resumed dividend payments and will pay a distribution of 6.2p per share in July, which analysts say sits well with ESG standards because it will also repay the £121mln received by the government through the furlough scheme.

It seems it may be a year of two halves, where the “exceptional” performance of the Grocery, Sugar, Agriculture and Ingredients businesses helped offset an estimated £1.1bn of lost sales in Primark in the first half.

However, the FTSE 100 group forecast a softer performance in the second half, as the Sugar arm is recommissioning of a bioethanol plant in Hull, UK, while Grocery volumes will be softer as sales normalise after a spike during lockdowns.

Full-year profits at Ingredients and Agriculture are expected to be in line with last year with the impact of higher commodity costs affecting the second half.

Nonetheless, Primark is estimated to be highly cash generative and to offload more stock than normal, but profits will be “somewhat lower” than last year.

“Overall, the group has a fight on its hands but has adjusted the factors within its control. Revenues may have dipped by 17% and pre-tax profit by 8%, but the group remains comfortably profitable with the return to some sort of normality an appealing prospect for its flagship brand in particular,” said Richard Hunter, head of markets at interactive investor.

“The share price performance reflects the careful way the business has been managed, having risen by 24% over the last year, as compared to a gain of 20% for the wider FTSE100.”

“The particularly strong recent run of a price which has increased by 41% over the last six months may have resulted in some profit-taking in early trade. Even so, with the way ahead beginning to clear as lockdowns ease, the market consensus of the shares as a strong buy suggests that AB Foods will be well placed to pounce on the recovery.”

Shares shed 4% to 2,373p on Tuesday at noon.