Primark owner Associated British Foods plc posted its 2020 annual report that reflect declines due to the impact from the coronavirus pandemic.
In a Nutshell: “To say that this has been an extraordinary year would be something of an understatement. The rapid spread of Covid-19 across the globe has affected everyone in ways which we could not have imagined a year ago. When we first heard of Covid-19 our business concerns were around the disruption to the supply chain of goods coming from China. However, as the virus rapidly spread around the world it was clear that its effect would be more profound,” Michael McLintock, chairman, said.
“For our group, we were required to close all Primark stores in Europe and the US in just 12 days in March. This was not something that we had ever envisaged. Unable to sell anything, Primark moved from profit to loss in a few short days, with no visibility as to how long these conditions would persist,” McLintock added. “Closure for six months seemed plausible, with the possibility of it being significantly longer. These monthly operating losses, together with the need to pay for goods in transit, would place a severe strain on the group’s cash reserves and necessitated immediate management action.”
The chairman said measures to mitigate cash outflow, such as stopping further factory orders and accessing government job retention schemes, helped the company to preserve the jobs of 68,000 employees. It also faced other operating challenges in its food business, whether it was meeting the consumer shift to eating at home or adapting workplace and production requirements for social distancing.
McLintock cited the Primark team’s ability to rapidly reopen stores, opening as many as 153 stores in one day in England. While Primark returned to profitability once the stores were allowed to reopen, which “allowed us to sell down the majority of our spring/summer stock on hand with minimal markdown,” the operation still suffered a cash outflow of 800 million pounds ($1.05 billion) while stores were closed after making supplier payments and incurring the net operating losses, he said. McLintock also said the company declined to participate in the U.K. Government job retention bonus in July since the stores had reopened and the business was profitable again.
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“Paul Marchant, CEO of Primark, and his leadership team deserve a special mention. They demonstrated tremendous energy and professionalism throughout a succession of challenges,” the chairman said. He also added that the impact on Primark from the increasing number of government restrictions in the markets that it operates is “significant.”
Parts of the U.K., mostly in its northern region, began issuing stricter policies on movement over the past few weeks, and on Saturday U.K. Prime Minister Boris Johnson said that the U.K. could be on its second national lockdown beginning on Thursday as coronavirus infection rates have started to climb. The Parliament is expected to vote on the planned measure on Wednesday.
ABF on Monday said if the measure passes, Primark stores could lose an estimated 375 million pounds ($490.1 million) as a result of new shutdowns. Already, Primark stores in the Republic of Ireland, France, Belgium, Wales, Catalonia in Spain and Slovenia are temporarily closed, representing 19 percent of total retail selling space. If stores in the U.K temporarily close on Thursday, then 57 percent of Primark’s total selling space would go dark.
Net Sales: Group revenues fell 12 percent to 13.94 billion pounds ($18.21 billion) for the year ended Sept. 12.
CEO George Weston said that most of the reduction in sales occurred in the third quarter, driven by the total loss in sales for the three months in which Primark’s stores were closed. Before the pandemic, the Primark business performed well in the first half of the year, achieving growth in U.K. market share and making further progress in the German market. He added that the business received an “overwhelming response” when it reopened its doors, with “queues outside most of the our stores on reopening days…. We also opened nine new stores in the second half, including our first store in Poland.”
Primark sales were ahead of pre-Covid-19 levels in children’s, leisure and nightwear and weak in formal men’s wear and travel accessories, reflecting the shift in customers spending more time at home. “Sales at our stores in retail parks are higher than a year ago, shopping [centers] and regional high street stores are broadly in line with last year, and large destination city centre stores which are heavily reliant on tourism and commuters have, not surprisingly, seen a significant decline in footfall,” Weston said.
Weston added that all of ABF’s businesses “have completed all practical preparations should the U.K. exit the Brexit transition period with or without a trade deal. Primark operates largely discrete supply chains for its stores in each of the U.K., U.S. and Europe [operations] and the group’s food production is largely aligned with the end market. As a result, there is relatively little group cross-border trading between the U.K. and the [European Union]. Contingency plans are in place should some of our businesses experience disruption.”
Earnings: Profits before taxes fell 40 percent to 686 million pounds ($896.2 million), while earnings per share fell 47 percent to 57.6 pence ($0.76). On an adjusted basis, profit before taxes were down 35 percent to 914 million pounds ($1.19 billion), reflecting a 41 percent drop in adjusted earnings per share to 81.1 pence ($1.06).
The company is not providing any projections for 2021, given the uncertainty around Covid-19.
CEO’s Take: “I am proud of how our people have responded to the many challenges presented by Covd-19…. “Following a three-month closure, Primark delivered a robust performance, receiving an overwhelmingly positive response when it safely welcomed customers back to its stores…. We have the people and the cash resources to meet the challenges ahead and we are investing for the future,” Weston said.