The Associated British Foods (LSE: ABF) share price jumped more than 7% this morning, despite warning markets that full-year operating profits are set to fall by two thirds. Such are the times we live in.
With everybody braced for bad news, the slightest glimmer of hope is something to celebrate. Associated British Foods is best known for its discount clothing chain Primark which shut all 375 stores in March due to Covid-19. Worse, it had no online shopping site, unlike many competitors.
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The move cost the FTSE 100 company £650m in lost sales every month. Today, it warned that Primark’s full-year adjusted operating profit will range from £300m-£350m for the full year, down from £913m last year.
Some investors forget that buying into the Associated British Foods share price gives you a sugar, grocery, agriculture and ingredients business as well. They’ll be remembering today. While Primark revenues crashed 75% in the third quarter, grocery sales partially offset this, rising 9%. Ingredients revenues rose 3%, sugar fell by 1%. Management expects “strong progress” in these areas over the next year. Diversification has benefits after all.
However, the focus is now firmly back on Primark. The retailer has now opened most of its stores in the UK and overseas, with avid shoppers forming queues from 5am on opening days.
Today, management says that trading in its reopened stores has been “reassuring and encouraging.” It reported strong demand for childrenswear, leisurewear and nightwear, and summer products, such as shorts and t-shirts. Formal menswear and travel-related accessories were weak, unsurprisingly. City centre stores have been hit by the lack of tourists, and much lower commuter footfall.
The Associated British Foods share price is back
Primark halted orders during the lockdown, but has now placed more than £800m for the autumn/winter season, and expects the total to top £1bn. It’s also restarted new store openings. To give you an idea of the group’s increasing international reach, locations include Belgium, Germany, France, Spain, Portugal, Poland and Florida. It will soon have 11 stores in the US, with more to come.
June trading looks promising, even without discounting. No wonder investors are piling into the Associated British Food share price today. As confidence grows, it should benefit from a wave of pent-up demand for fast fashion. Reading these results almost makes me believe in a V-shaped recovery.
In April, the FTSE 100 group suspended its dividend, while reassuring investors it has plenty of cash at its disposal, around £1.5bn. That should hold it in good stead, if we see a second wave of infections, or a wider slowdown.
Bricks and mortar retail is a tough sector, but Primark seems to have cracked it. The lockdown ‘cash burn’ is over. Now it can look forward to generating it instead. There’s no dividend, but that will be back at some point.
Despite today’s rally, the Associated British Share price is down almost 25% from its January peak. That looks like a stock market crash bargain to me. You might want to take a look at this too.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.