Primark strong despite comp sales dip on weather woes
At a time when any fashion-focused business that doesn't have a webstore is performing poorly, the best-known physical-stores-only retailer, Primark, is always going to be closely watched. And the chain’s parent company made headlines Monday as it delivered a trading update that showed a rare comparable sales blip, even though Primark continues to deliver on the sales front overall.
In the 52 weeks up to mid-September, it wasn't one long triumphal progress and its like-for-like sales have fallen. In a trading statement ahead of the close of its full-year period next week, it said sales should be 5.5% ahead of last year at constant currency (6% at actual exchange rates), driven by increased selling space. But this will be offset by a 2% decline in like-for-likes (LFL).
The company doesn't seem to be too upset with that dip and said that the chain “has performed well in the UK, where full-year sales are expected to be 6% ahead of last year, and our share of the clothing market has increased significantly.”
UK LFL growth should be 1.5%, good news in a market that’s undeniably challenged. That was because it had “a strong first half and a second half performance in line with an exceptionally strong second half last year.” Meanwhile, Spain, Portugal and its first four stores in Italy “delivered very strong sales growth in the year.”
So what exactly went wrong to drag overall LFL sales down? A “decline in northern Europe where the unseasonable weather during three periods this year led to difficult retail conditions,” was to blame but, despite this, “sales in northern Europe were well ahead of last year driven by increased selling space.”
And with “early trading of the new autumn/winter range [having been] encouraging,” that view is likely to be justified.
And the US? It has opened in ninth store there, in Brooklyn, but rarely gives specific trading figures for the market and that was the case this time too. “We continue to optimise our US operating model and, as previously advised, selling space was reduced at existing stores in Freehold and Danbury in May 2018,” it said. “We have been encouraged by the trading of these stores and the consequent benefit to store profitability.”
MARGIN UPS AND DOWNS
Back with the wider picture, H1 operating margin was 9.8%, down from 10% year-on-year, due to the adverse effect of the US dollar exchange rate on purchases. But margin in H2 will be “well ahead of the first half and last year, driven by the benefit of the weakening of the US dollar exchange rate on purchases and by better buying.”
And following “a very successful sell-through” of its summer ranges the H2 level of markdowns was lower than expected, although above the “unusually low” level of a year ago. Operating margin for the full year will be around 11% compared to 10.4% in the prior year. And it expects to maintain that margin in the next financial year.
But of course, it couldn't ignore the elephant in the room - Brexit - and said that the exchange rate applicable to sales in H2 of the new year “will be sensitive to sterling exchange rate volatility which is likely to arise given a period of intense Brexit negotiations.”
Regardless of what happens in the wider economy, the company continues to focus on expanding its store estate. In the past year, retail selling space increased by 0.9 million sq ft with 15 net new store openings. This brings the total estate to 360 stores with five added in Germany, four in the UK, two in France and one each in Portugal, Belgium, Spain, Netherlands and the US. In the year ahead, it will open 14 new stores, mainly in Germany, France, Spain and the UK.
And the devastating fire that destroyed its store in central Belfast last month doesn't seem likely to dent the overall performance. The replacement cost of the building and resulting business interruption was insured.
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