Associated British Foods (ABF), owner of cheap-as-chips clothing and accessories chain Primark, delivered a mixed bag of results for the first half of the fiscal year on Tuesday.
ABF, which also has a grocery division, said like-for-like sales at its Primark and Penneys retail chains slipped 1 percent in the six months ended Feb. 27, compared with the same period a year ago. The company blamed this on unseasonably warm weather across northern Europe in the weeks leading up to and over Christmas.
That being said, increased selling space as well as a strong like-for-like performance in France helped push first-half revenues up 7 percent to 2.6 billion pounds (about $3.7 billion) on a constant currency basis.
“Early trading at our two stores in the U.S. has been encouraging, with very positive customer feedback,” CEO George Weston said in a statement, referring to the Boston and Philadelphia locations that opened late last year. “Footfall and sales density have increased steadily as awareness of the Primark brand, which started at a low level, continues to grow.”
Six more stores are slated to open stateside later this calendar year, in addition to a 70,000-square-foot space in the American Dream shopping mall in New Jersey in 2017, which will bring the total number of U.S. locations to nine.
But the retail arm’s operating profit, which makes up more than half of ABF’s overall profits, was hit hard by foreign exchange headwinds and dropped 1 percent to 313 million pounds (about $451 million).
“As previously explained, Primark buys a substantial proportion of its garments in U.S. dollars, and sells them in euros and sterling, giving rise to transactional currency exposures. Forward currency contracts are taken out to cover these exposures when orders are placed,” Weston said, clarifying that last year’s results were therefore protected from the weakening of the euro against the U.S. dollar in early 2015.
However, he added, “The impact of this devaluation was felt in the first half of this year when the operating profit margin of 11.7% was 0.9 percentage points lower than last year. This margin decline was smaller than had been expected, as much of the impact of the stronger dollar was mitigated by a good buying performance and a lower level of markdowns arising from a well-managed stock position. This margin decline also included the net cost, in the U.S., of the head office and warehouse which only supported two stores in the first half.”
On the bright side, the exchange rates applicable to most of Primark’s purchase orders for the second half have already been fixed, and ABF chairman Charles Sinclair expects any further impact on the retailers’ margin for the balance of the financial year to be limited.
With regard to the looming British referendum on European Union membership, set to take place on June 23, Sinclair said that ABF is “an international business community with diverse interests across 48 countries” and a business model that aligns products with the end markets for its products wherever possible. To that end, Primark’s “discrete supply chains” for its stores in each of the UK, U.S. and eurozone markets means that it undertakes “relatively little” cross-border trading between Britain and the rest of the E.U.
Primark’s selling space has increased by 300,000 square feet since the end of the last fiscal and a further 1.1 million square feet will be added toward the end of the second half, including its second store in Italy in early autumn.
ABF also reiterated its intent to invest in Primark’s warehouse infrastructure and said that by the end of this year it will have double the capacity it had in 2013.