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February 28, 2022

Primark H1 set for 60% sales hike as footfall picks up

Associated British Foods Plc (ABF) expects Primark sales for the first half to be well over 60% ahead of last year, with footfall picking up in most markets, particularly the UK and Ireland.

By Beth Wright

In a pre-close update for the 24 weeks to 5 March 2022, ABF said all Primark stores are trading and remained open throughout the half-year, except for short periods of store closures in Austria and The Netherlands. This compares to prolonged periods of store closures in the UK and Europe in the first half of last year.

Like-for-like sales have improved compared to the final quarter of the 2021 financial year and for the first half are expected to be 11% lower than pre-Covid levels in the same period two years ago. 

Sales in UK stores are said to be well ahead of last year, with like-for-like sales improving and expected to be 9% below two years ago. Total sales are forecast at 8% below two years ago. Stores in retail parks and town centres continue to outperform destination city centre stores with like-for-like sales in retail parks ahead of pre-Covid levels.

Sales in Continental Europe are also well ahead of last year. Like-for-like sales for the period are expected to be 14% below two years ago reflecting the continued impact of Omicron on customer footfall. Total sales are expected to be 2% below two years ago which includes a 12% increase in retail selling space.

ABF added it estimates a sales loss of some GBP32m (US$42.9m) relating to the short periods of store closures in Austria and The Netherlands during the period.

Meanwhile, Primark’s US business continues to outperform the rest of the store estate and is on track to deliver 2% like-for-like sales growth in the period compared to pre-Covid levels with total sales 35% ahead of two years ago.

ABF added operating profit margin has “recovered strongly” and is now expected to be some 11% in the first half, close to the pre-Covid levels achieved two years ago.

“This mainly reflects our stores trading for the whole of the period and an increase in sales densities over the same period last year,” ABF said, adding the effect of inflation on raw materials and supply chain costs in the first half has been broadly mitigated by a favourable US dollar exchange rate and a reduction in store operating costs and overheads.”

With its stock purchases largely committed for the second half of the financial year, the group expects some reduction in the operating profit margin from that achieved in the first half reflecting further inflationary pressures.

Elsewhere, ABF noted the pressure of disruption to the supply chain experienced in the autumn has continued to alleviate despite some delays in dispatch and slightly longer lead times.

The group expects to add a net 0.5m sqft of additional Primark selling space this financial year, adding: “We continue to make good progress with new store signings, in line with our ambition to grow our store estate to some 530 stores over the next five years, with a particular focus on the US, France, Italy and Iberia.”

Towards the end of last year, Primark announced plans to pump more than EUR250m (US$283.7m) into its home market of Ireland over the next ten years, creating more than 700 jobs.

Primark, which operates as Penneys in Ireland, said the jobs will be created over the course of the next three years, while its selling space in Ireland will increase by an estimated 20% within the next ten years.

Primark is still reluctant to embrace digital retail

GlobalData apparel associate analyst Louise Deglise-Favre notes Primark has failed to recover to pre-pandemic levels due to its reluctance to fully embrace digital.

She says while Primark’s total H1 FY2021/22 sales have grown over 60% on the year, this is due to weak comparatives.

“Versus pre-pandemic levels, total sales remained 4% down, with like-for-like (l-f-l) sales 11% lower despite most stores being open for the entire period, except for short-lived closures in Austria and the Netherlands. This will partly be a result of the rise of the Omicron variant towards the end of last year negatively impacting footfall, however, it also begs the question of whether its l-f-l sales will ever return to pre-Covid levels now that significant clothing and footwear spend has shifted online.

“Primark continues to outperform in the US, with sales up 35% versus pre-pandemic due to its store expansion in the market, and two-year l-f-l sales rose 2%. However, the retailer is still struggling in its crucial markets of the UK and Continental Europe, with l-f-l sales remaining 9% and 14% lower than 2019 respectively. Despite this, Primark remains committed to growing its physical estate, having opened four stores in Continental Europe in H1 FY2021/22 with further expansion in the US, Iberia, France, and Italy in the rest of the financial year. While this strategy has proved successful for the retailer in the past, its reluctance to embrace digital retail will remain its main hindrance in the future as consumers continue to migrate to online shopping.”

Deglise-Favre adds Primark plans to launch its revamped website in the UK by the end of next month, which will allow shoppers to see in-store stock, however, she says it has still not indicated any plans to make this transactional.

“The online channel is expected to continue outperforming post-pandemic, with forecast online penetration of 27.6% in 2022 in Europe (versus 18.6% in 2019), so without a transactional site, Primark is at risk of losing market share to other value players that operate strongly online, such as boohoo.com and Shein.”

Elsewhere, she notes Primark has stated it was able to mitigate the ongoing supply chain cost increases throughout its first half thanks to favourable US dollar exchange rates and a reduction in store-related costs, protecting its operating profit margin which stands at 11%. However, the retailer expects this margin to take a hit in the second half of the financial year as raw material and shipping costs continue to rise even further.

“These issues will likely be exacerbated in the retailer’s Eastern European manufacturing sites of Moldova, Romania and Bulgaria, as the conflict in neighbouring Ukraine is bound to logistically disrupt the area. However, inflationary pressures on shoppers’ discretionary spending will provide an opportunity for Primark as many consumers will feel the need to trade down to value retailers.”

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