Fast fashion is back, says Primark owner Associated British Foods. Shoppers are out and about, seeking new clothes for socialising and work. Strong consumer demand prompted the FTSE 100 conglomerate to lift its profits outlook for the year. The news rewarded investors’ recent optimism. The shares have risen by more than a fifth this year.
Are they still worth queueing for? Primark’s margins are getting squeezed. The half-year operating profit is likely to be in line with last year’s, even though group sales are more than a fifth ahead — or 16 per cent at constant currency.
Primark, the discount fashion retailer which accounts for most of ABF’s profits, expects its first-half margins to fall from 11.7 per cent to about 8 per cent. Nor is ABF fully passing on extra costs in the grocery and sugar business, which account for about a quarter and a tenth of operating profits.
The greenback’s strength remains a problem. The bulk of Primark’s clothes, sourced in Asia, are denominated in dollars. The company remains wary of scaring off value-conscious customers.
A longer-term question concerns Primark’s refusal to embrace online shopping — apart from a click and collect trial of children’s products. Primark considers its low prices incompatible with the extra costs of building an ecommerce network. But online competition may reduce its potential market. Sales are still not back to pre-pandemic levels everywhere in Europe.
However, falling energy and freight costs will ease the pressures on Primark. The cost of shipping a container from Asia is now back about $2,000, having risen to nearly eight times that at the peak.
ABF has come through the pandemic in good shape. The success of its store formats overseas and the stability of its ownership inspire confidence. The shares trade on a 10 per cent discount to the long-term forward price earnings average of 17.5. That is still costlier than Primark’s throwaway fashion. But medium-term growth prospects justify a bullish view of the shares.
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