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Could buying AB Food shares be a defensive move?



It’s been a tough 12 months for the owner of Primark but could it now be on the road to recovery?

UK shoppersSource: Bloomberg
IG Analyst | Publication date: Friday 04 February 2022 

With a cost of living crisis upon us, inflation to hit 7%, according to the Bank of England, which raised interest rates this week to 0.5% and soaring energy prices, now is the time to seek out stocks with defensive qualities or that offer resilience in tough economic times. Having lost over 20% of its value in the past year, shares in Associated British Foods PLC look increasingly attractive.

Shares in the food producer dipped last month after revealing that fourth-quarter sales at its Primark stores had been hit by Omicron. The food producer, which also owns the discount clothing chain, said that group revenues from continuing operations for the 16 weeks to 8 January 2022 were 16% higher at actual exchange rates, while at constant currency sales were 19% higher.

However, its Primark clothing outlets experienced a drop in sales in the run-up to Christmas over Covid fears. Total Primark sales for the trading period were 5% below levels for the same period in 2020 – before the Covid lockdowns – with like-for-like sales 11% lower. The company said trading was being affected by lower customer footfall due to an increase in Omicron cases and that it was “difficult to predict future trading conditions”.

Retail gloom

Retail has been one of the sectors hardest hit by the Covid-19 pandemic, as lockdowns forced non-essential shops to close and worried consumers have steered clear of high street stores, preferring to shop online. UK retail sales in general fell 3.7% in December, according to the latest Office of National Statistics figures, due to concerns over the Omicron strain of Covid. Non-food stores saw sales drop 7.1% in December, with clothes sales down 8% compared to November.

"However despite the fall in December, retail sales are still stronger than before the pandemic, with over a quarter of sales now made online,” said the ONS’ deputy director for surveys, Heather Bovill.

Online retail sales improved to 26.6% in December (26.3% in November), compared with 19.7% in February 2020, before the Covid pandemic hit.

Primark does not operate an online business. However, management at AB Foods says that the recent improvement in footfall in the UK and Ireland has been “encouraging” and sales at the stores should be “significantly better” than in the same period last year when the outlets were closed. What’s more, while it will be affected by raw material cost rises, wage costs and energy prices, Primark is likely to show some resilience in the rising cost of living crisis given its wide appeal as a discount clothing store.

Time to buy?

Could this be a buying opportunity? Shares in AB Foods are down 22% from 2473p to 1919.5p since March last year but could be on the road to recovery – Covid and costs willing.

Despite the Omicron gloom and short-term uncertainty over the trading outlook, the company looks to be in good shape. Earnings guidance for the full year remains unchanged and cost-cutting, along with a new Oracle stock management system at its Primark stores, should help keep it leaner. It is also opening new floor space in Eastern Europe, while its new customer-facing website comes online later this year.

What’s more, its food production business also looks strong. Sales in grocery, sugar, agriculture and ingredients were 6% up on last year at constant currency, despite inflationary pressures. European sugar sales rose 12% compared to the same period last year due to strong pricing - a result of stock shortages on the continent - while ingredient sales were up 10%. These are the types of consumer staples that customers still need, regardless of the rising cost of living, so, while the company won’t be immune from price hikes, AB Food shares should offer some defensive qualities in uncertain times.

Bouncing back

Analysts at Jefferies said that the effect of Omicron was not as bad as anticipated and that it was hoped this would be the "last Covid-related deterioration in sales momentum".

"Past periods of reduced restrictions have shown Primark's ability to defend strong consumer attractions and double-digit margins," they said in a note.

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*Based on revenue excluding FX (published financial statements, June 2020).


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