“Ahead of last year”: it’s not the catchiest of phrases, but it’s the one that describes the latest trading update from Associated British Foods (LSE:ABF) most accurately. Those precise words were used by ABF seven times in its latest trading update.
ABF is unusual because of the diverse nature of the business. There is the retail arm, better known as Primark, and there are the sugar, grocery, agriculture, and ingredients businesses. In addition to Primark, well-known ABF brands include Twining’s Tea, Kingsmill, and Patak’s.
This week saw the company’s latest trading update covering the 24 weeks to 29 February. Adjusted net profits, plus revenues for Twining’s Tea, sugar, the agriculture business, and ingredients are all expected to be, you guessed it, ahead of last year. As for Primark, both overall sales and Eurozone sales are also expected to be ahead of last year.
The only times the update deviated from that description were in describing the US retail operation (”strongly” and “particularly strong”) and the grocery business, for which revenue was merely expected to be “in line with last year.”
What is most interesting about the company is the international expansion of the retail business. Primark is becoming known as a ’quality, budget’ product, and expansion in the US and central and Eastern Europe is certainly turning heads among analysts, if not on the catwalk.
As for the share price, whether you sigh or cheer at its performance to date depends on the time-frame you look at. Shares have risen by slightly less than 10% over the last year, have fallen by around a fifth over the last five years, but have increased six-fold so far this century.
There is, however, one major concern revealed by the trading update. I also have a bigger longer-term concern.
Is the future sustainable?
The update revealed the possibility of supply being adversely effected by the coronavirus, given that both some of its food businesses and Primark rely on a cheap flow of products from China. ABF says that it has a good inventory of products but it is clear that if the virus threat continues for many more weeks, then the ABF supply chain issue will become a problem.
Longer term, I am just not convinced that budget clothes have much of a future as we become increasingly concerned about sustainability. The Primark offering, typically clothes that are worn just a few times before disposal, is the antithesis of the environmentally conscious culture that seems to be developing so fast and, indeed, out of necessity.
I believe that the pendulum will swing away from budget to longer lasting clothes. If the coronavirus continues to spread, consumers may become increasingly conscious of the risks of mingling with a large number of people in public. We may have no choice but to mix with people when travelling to work, but shopping for fashionable clothes is a choice. Furthermore, online shopping provides a realistic alternative.
There are plenty of investment opportunities out there. I am not so sure that ABF is among the best of them.
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Michael Baxter 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.