Store growth helps drive Primark FY sales rise
Full-year sales at Primark are expected to rise 4%, helped by increased selling space, but the value fashion retailer has also warned it expects a reduced margin next year.
In a pre-close period trading update today (9 September), parent company Associated British Foods (ABF) said Primark sales in the 52 weeks to 14 September have been helped by increased selling space, offset by a 2% decline in like-for-like sales. It added that "early trading of the new autumn/winter range has been encouraging."
First-half operating margin of 11.7% was well ahead of the previous year's 9.8%, driven by a weaker US dollar on contracted purchases, better buying and tight stock management. As expected, margin in the second half will be lower reflecting the effect of a stronger US dollar on purchases. ABF added stock has continued to be "managed tightly" and markdowns in the second half are now expected to be in-line with the good performance last year. The group's full-year outlook for operating profit is unchanged, with margin ahead year-on-year.
However, the company added the strengthening of the US dollar during this year and the recent weakening of sterling will increase the cost of goods for next year.
"We anticipate achieving some mitigation from reduced materials prices, the favourable effect of exchange rates in sourcing countries and better buying. Combined with a more typical level of markdown, we expect a reduced margin next year," it said.
Primark "performed well" in the UK where sales in the total clothing, footwear and accessories market have been weak. It continued to deliver a significant gain in market share in the country, with sales growth of 3% and a like-for-like sales decline of 1%.
Sales in the Eurozone are expected to be 5% ahead of last year at constant currency, with particularly strong sales growth in Spain, France, Italy and Belgium. Like-for-like sales, however, fell by 3%, driven mainly by a weak performance in Germany.
The retailer's US business continued to deliver strong sales growth, driven by "excellent trading" at the Brooklyn store, which opened last summer, and like-for-like growth. This, coupled with the lower operating costs arising from the selling space reduction in three stores, will result in a significantly reduced US operating loss, ABF said. The group will open its tenth Primark store in the US at American Dream, New Jersey this autumn.
Retail selling space increased by a gross 0.95m sq ft this year, with 14 new store openings. Four stores were added in the UK; three in Germany; two in Spain; two in France and one each in Belgium, the Netherlands and its first store in Slovenia. This brings the total estate to 373 stores trading from 15.6m sq ft compared to 14.8m sq ft a year ago.
In the next financial year, ABF is planning to add a net 1m sq ft of additional selling space, weighted to the second half. France and Spain will see the most space added and ABF expects to open 19 new stores together with a number of relocations and extensions.
Shore Capital analyst Darren Shirley notes: "Full-year Primark sales growth of 4% is a "little below our expectations (SC forecast 5.2%), with new space contributions partially offset by a 2% decline in like-for-like sales (SC forecast -1%)."
He adds: "We remain positive on the medium-term ABF investment case, notably the growth potential of Primark and the strong cash flow and balance sheet which provide optionality. However, we concede that a return to positive like-for-like growth and the end to significant margin volatility are required as precursors to any re-rating, which is unlikely in the short term."