AB Foods (LON:ABF) has pulled its interim dividend as it reported a fall in H1 profits owing to the ongoing COVID-19 crisis.
Prior to the coronvirus outbreak, the Primark part of the business had been performing well, with an improving market share in the UK and solid performance in other parts of Europe.
Primark represents 65% of AB Foods’ operating profit. All 376 stores were closed around the world as since March 22. Given that the store infamously has no online offering, this ultimately means that a gapping hole has been left in the overall revenue picture amid lockdown.
The Loss
Primark usually brings in £650 million a month, this revenue has literally evaporated as the stores closed its doors and, in today’s climate, it is impossible to gauge when those doors may reopen again. Some European stores could open soon. However, even when they do start welcoming customers again, strict social distancing rules are likely to continue for the foreseeable future, meaning that revenue and profits from Primark are likely to be significantly reduced for some time.
The Cost
Taking into account the governments furlough scheme and the rates relief program the cost of Primark stores standing idle is around £100 million per month. Statutory profits were also hit by a £284 million charge from Primark inventory as the inbound supply chains continued for a few weeks with stock in transit.
The Grocery Business
On the other side of the business, the grocery business, which contributes around 28% to profits, has been holding up well. The area has been benefitting from panic buying and stock piling seen in many countries ahead of the COVID-19 lockdown. The sugar component is less important to the business, making up just 2% of profits.
Unsurprising Move
Liquidity isn’t expected to be a problem for the group, which has £1.5 billion on April 21, thanks to cash, a fully drawn bank facility and access to the British government's COVID-19 corporate financing scheme. Even so the board has decided to hold firm on the interim dividend, hardly a surprising move in the circumstances.
While many retails on the high street may struggle to survive these unprecedented, tough economic times, Primark is unlikely to be a retailing casualty from coronavirus. While Primark will remain a fixture on the UK high street, it will be a very long slow recovery for Primark and the wider retail sector as a whole.
Levels To Watch
The share price has dropped 30% since the start of the year, faring worse than the FTSE, which is down 24%.
AB Foods continues its recovery from the March 19 low, however, after losing 6.6% in trading today, the price is getting dangerously close to the ascending trend line support. A break below 1830p (trend line) could see more bears jump in.
Immediate support can be seen at 1843p (today’s low) prior to 1830p and 1677p.
Resistance can be seen at 2050p (high April 17) and 2141p (high March 10).