Primark has only just started to test market – one or maybe two stores so far – in the US so it’ll not appear on the radar screen of most investors here. But it’s expanded out of the UK market across Europe in recent years and has done exceedingly well while doing so.
The basic offering is rock bottom prices – €2 t-shirts for example, €3 if you want the long sleeves – on a wide selection of perfectly acceptable clothing. I’m wearing one of those Ts right now as it happens.
The concern has been that given the shutdown there will be a disruption to this model. Not all the claims of possible disruption are entirely compatible with each other but there we are. My own view is that they’re going to be fine.
Associated British Foods (OTCPK:OTCPK:ASBFY)
Primark has been described as the jewel in the crown of that wider holding company, ABF. An excellent guide to the details of that claim is here on Seeking Alpha. There’s no point in my repeating that well presented information.
The importance to us here is simply that if Primark is thought to be about to do badly then so will ABF. If sentiment is in Primark’s favour then so will it be for ABF.
Worries about Primark
Of course, Primark has been closed along with near all European retail this past couple of months. That’s clearly put a dampener on the stock price. But there has been more to it than that. The worries coming in three separate sets which I’ll deal with in turn.
Treatment of Bangladeshi factories
Much of Primark’s stock (from personal examination, most of the cotton stuff for examples, much polyester coming from China and or India) comes from Bangladesh. When the lockdown came they, in common with many other of the big retailers, simply cancelled orders. Even of product that had already been made but not as yet shipped, let alone orders that were in preparation, or where materials had been bought in but not yet processed. H&M treated suppliers rather better.
This is logical in one view, if the stores can’t open then why have stock in the pipeline to the stores? But that’s a little short sighted, for when the stores open again it will be the same collection of factories that bid to make the next set of stock.
As it happens I have good contacts among the owners of such factories – it’s an odd reason why and not relevant here – and there was significant ill will as a result. That could have made it much harder in future to gain good pricing or even to contract with the best factories. A Philip Day (Edinburgh Woollen Mills) is likely to find out for he has continued to leave those suppliers hanging. Primark rethought and contributed substantially to a fund to pay workers who were laid off for the duration. Word I’m getting back is that all ruffled feathers are now smoothed as far as Primark is concerned.
Supply in the future is not going to be a problem nor even affected.
There is a concern that retail spending is going to be massively depressed after recent events. That remains to be seen although the manner in which consumer incomes are actually up is a US phenomenon, not European. That’s a function of how relief has been offered.
However, there is something else to consider. Which is that sales at the bottom end often rise – yes, rise – when consumer spending is in general constrained. Known in English as the “lippy effect”.
This is the idea that when people are short of money then they can’t, indeed, afford that new dress from Zara, the summer outfit from Monsoon. It is possible though to go do a little bit of retail therapy and buy some new lipstick. There are those, and it even appears to be true for a brand of two, that lipstick sales rise in recessions.
At which point we need to decide well, are Prmark’s clothes at the lippy end of the market or the full outfit as a treat end? As anyone who has ever been into one of the stores will know, at the lipstick end even as they sell clothes, not cosmentics.
There’s serious concern that all clothes retailers are going to be left with dead stock. At closedown they’d have had spring and summer collection in. By August they’d usually be well on the way to selling winter gear again. That stock that would have been sold in the spring is dead- no point in saving it until next year as fashion will have changed by then.
Primark doesn’t think it will get hit with this:
Associated British Foods, the conglomerate that owns the fast-fashion retailer, said that although Primark had lost £650 million of sales a month during lockdown and was sitting on almost £2 billion of stock, it would not be slashing prices.
John Bason, 63, finance director of ABF, said: “When we reopen, customers will be greeted by the same everyday great prices. There is no need for a fire sale of stock because we will be able to sell these goods later.”
Well, OK, but will they need a sale to get customers back into the buying mood? To test this out I went yesterday morning to the local Primark store (here in Portugal). The first day of opening after the closedown. There was no sign of any sales. Actually, fewer bargain prices than they normally have, there’s usually something or other they’re selling off cheap.
Further, there was a substantial line of people waiting to get into the store. But the time we left – and measuring by eyeball – it was about 20 minutes long that queue. The reason for this is obvious, there are space limits on how many are allowed into the store at any one time now and they’re a lot lower than the previous fire marshall limits. So this isn’t evidence of some demand greater than normal.
But note what this does mean. The limitation on sales isn’t how many people they can attract to the store. They’re already gaining more than they can handle at any one time. So there’s no point whatsoever in cutting prices to attract more custom, is there?
Perhaps for a different reason I think that Primark are likely right, they will be able to maintain margin.
I don’t think that everything’s going to peachy, not at all. I’m also not claiming that everything’s going to bounce back to how it was in retail. But there are specific worries about clothing retail. Supply lines, the need for margin compression and sales and falls in retail spending likely coming.
From personal observation and a little shaking of the network tree I don;t think those are going to hurt Primark as some are saying they might.
The investor view
ABF has been held back by concerns over how Primark will do after lockdown. I think those concerns are overdone.
I don’t think this is a big enough temptation to buy into ABF, not just for this reason alone. But if this was a stock you were thinking about anyway then this could be the positive news that tips the balance. Bull on ABF.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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