Primark continues to shine in first half but margins dip
Primark owner Associated British Foods was upbeat Monday as it delivered a trading update for the almost-complete first half that showed its Primark operation is continuing to prosper.
With H1 due to end in just a few days’ time (on March 4), it looks like sales will be well ahead of last year.
The company said that sales at the Anglo-Irish chain are expected to be up 11% compared to last year on a currency-neutral basis, and 21% ahead on a reported basis, which shows just how much of a boost the weak pound gave it.
The figures look even better when a calendar shift is taken into account with the prior year having contained an extra week and the current financial year starting a week later. When adjusted for that effect, the 11% becomes 12% and the 21% rises to 22%.
That said, much of the rise was due to new selling space as Primark continued to open new stores in its domestic markets and abroad. The company said average retail selling space was up about 12% in the first half.
So does that mean that the comparable sales story was not so good? Well, it is true that the growth was not as fast as the total figures. But UK comparable sales rose 2% and market share there increased. This is a relatively strong result given the challenging market conditions in Britain over the past six months.
Looking beyond the UK, overall comparable sales for Primark were flat, dragged down by the Netherlands where a rapid rise in selling space appears to have led to some cannibalisation of sales from existing stores. With the Netherlands taken out, group comps rose 1%.
This cannibalisation is a similar effect to that seen in Germany in earlier periods but it is clear that Primark is managing to stay generally ahead on the comparable sales front.
And as the figures show, new stores opened in the period traded strongly with Primark saying its six-store business in the US continued to develop.
One of the biggest questions for fashion retailers operating in the UK at the moment is around margins and the likelihood of price rises in the months ahead. Primark said that its stock was “well managed again” this period and markdowns were in line with the first half last year. Yet it expects the operating profit margin in the first half to decline, mainly reflecting the strength of the US dollar on input costs.
It said foreign exchange contracts are now in place for the majority of its remaining purchases for this financial year and its expectation for an operating profit margin decline for the full year is unchanged. This suggests the company has no plans to pass price rises onto its customers at present.
That makes sense. The UK is bracing itself for rising inflation in the months ahead and analysts expect shoppers to become increasingly price conscious as 2017 proceeds, giving an in-built advantage to retailers that are able to keep a lid on prices.
Instead, Primark will continue to drive sales growth through new stores. Retail selling space has already increased by 0.8 million sq ft since the end of the last financial year and at March 4, it will have 329 stores trading from 13.1 million sq ft. It added 16 new stores in the period, including several UK locations plus Ireland, Germany, France, the Netherlands and the US. It also opened its second Italian store and extended some existing locations such as the Tottenham Court Road site in London that grew by 40%.
It expects to add 1.3 million sq ft this year with five new stores due in the quarter ahead across the UK, Belgium, Spain, the Netherlands and the US, with its Boston store also being expanded.
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