Primark powers ahead, UK, US, Italy buoyant despite higher import costs

Value retail giant Primark is going from strength to strength we learned Thursday morning as parent company Associated British Foods issued an upbeat trading update. The fashion chain is performing “particularly well” in the UK and is also benefitting from the currency shifts that have seen the pound getting weakening since the EU referendum vote a year ago.


Primark


Primark was actually the star performer in ABF’s diversified portfolio of businesses with its currency-neutral sales 13% ahead, driven both by the new stores the company is opening globally and by those all-important comparable sales rising. Those new or expanded stores accounted for 13% more selling space in the period and the company said that at actual exchange rates, sales are 21% ahead year-to-date.

The past 16 weeks seem to have seen a sales acceleration with that 13% currency-neutral rise in the 40-week period moving up to a 15% increase in the last few months. But it stays at a 21% rise at actual exchange rates following a slight strengthening of the pound in recent months compared to its share plunge a year ago.

That improved performance in Q3 is good news for the firm, especially as it came at a time when many others in UK retail were struggling. The company said that Primark’s trading was particularly strong in the lead up to Easter and benefitted from comparisons with its performance year that had been dented by poor weather and an earlier Easter holiday.

Overall, the second half so far is turning out to be better than the first half and year-to-date sales in Britain are 9% ahead, with the firm continuing to increase its share of the total clothing market.

However, it wasn’t all good news. The pound’s fall may have boosted turnover but it also increased the cost of goods that Primark had to buy-in from abroad. The first half operating profit margin of 10% declined from 11.7% in last year’s H1, reflecting the strength of the US dollar on input costs.

And the company has already said that the full effect of sterling weakness against the US dollar would have a greater impact on the margin in H2 because currency hedges maturing in that period would be at less advantageous rates. But primark has been working hard to counter this and said the full-year and H2 margin decline should be in line with the first half due to lower markdowns.


Primark


Primark has continued to open stores fast and has added 1.3 million sq ft of selling space since the beginning of the financial year. As of June 24, it had 339 stores trading from 13.6 million sq ft of sales space. It opened 10 locations in Q3 alone, including two in the UK, Spain, Netherlands and US plus one each in Belgium and Italy.

“Early trading from these new stores, particularly those in Florence and the US, has been good,” it said. The company also extended the Downtown Crossing store in Boston, US, taking its selling space to 92,000 sq ft. It plans to add a further 0.2 million sq ft of selling space by the end of this financial year. That will see four new stores in Britain and its fourth Italian store opening in Verona.

ANALYST VIEW

Charlotte Pearce, a retail analyst at GlobalData said Primark appears to be on a roll: “Though retailers such as New Look and Matalan are forecast to lose share of the clothing market in 2017, Primark’s market share is set to increase by 0.2 ppts to 6.6%, retaining its position as number three in the clothing market.”

She said its focus on value for money and quality “remains important, particularly for cash-strapped shoppers as their budgets become even more squeezed.”

But she said that as it grows, the retailer must be careful to manage cannibalising sales in existing stores with its new openings and should turn its attention to improving the in-store experience in existing stores.

“Investing in technology such as RFID tags and self-scanners would bring Primark up-to-date with other retailers, and it needs to close the disparate gap its flagship stores, such as Tottenham Court Road, have with its other stores, in which the experience is wholly different,” she added.

She also thinks that it needs to keep a careful eye on the competition, not just in fashion. She said: “As competitor H&M is expanding its homewares range and River Island is set to launch a homewares range soon, Primark must ensure it does not lose appeal among shoppers as its own ranges can be skewed heavily towards the tween market and it could easily widen its appeal. Further investment in trend-led items both in homewares and its clothing ranges will be key to maintaining Primark’s performance.”

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