Latest retail sales data from the Office of National Statistics (ONS) gave the shopping sector some cause for concern — this showed transactions in September slip 0.3% from the previous month, driven by a 7.8% decline in clothing and footwear sales. This was the worst result since April 2012.
Still, the aforementioned effect of temporary unseasonable weather conditions can be put firmly at the doorstep of September’s retail weakness. And on an annual basis total retail sales still rose 2.7%, illustrating that the British shopping sector remains strong.
Given the opportunities here, I am looking at whether ASOS (LSE: ASOS) or Associated British Foods(LSE: ABF) is the better stock pick.
Primark’s expansion plans paying off handsomely
Associated British Foods cheered the market earlier this week when it announced adjusted operating profits at its budget clothing division Primark had leapt 29% to £662m in the year concluding September 2014, boosted by its breakneck expansion programme which pushed revenues 16% higher to almost £5bn.
The business hiked total floorspace more than 10% to 10 million square feet during the past 12 months, and its “highly successful” entry into the boulevards of France has taken the number of countries in its reach to nine. The clothing brand’s 278 stores operate solely across the UK and Europe, but Associated British Foods announced plans to enter the north-east of the United States by the end of 2015 and plans to have 10 stores up and running by the close of 2016.
And in the medium term, of course, Primark’s operations across the continent are likely to remain in vogue against a backcloth of low real wage growth, while stubbornly-high unemployment in its eurozone markets should also keep footfall ticking higher.
ASOS back in vogue after difficult year
Similarly, online retail house ASOS cheered the market last month with signs of improving performance after recent profit warnings. The company saw pre-tax profit slump 14% during the 12 months to August 2014, although news that revenues leapt by more than a quarter — to £975.4m — underlined the positive sales potential at the business.
Indeed, ASOS noted that 8.8m active customers as of the end of the year was up 25% from the previous year, and that it enjoyed its “highest ever average order frequency, conversion and average basket size.”
The company is now aiming to generate annual sales of £2.5bn by 2020, and is investing heavily to realise this goal. Not only has the business ploughed vast sums into improving its warehousing and distribution in the UK and Europe, but it has also introduced ‘zonal pricing’ which will enable it to restore price competitiveness in critical marketplaces.
On top of its prime position in the surging online retail market, ASOS is also looking to benefit from the growing popularity of click and collect services and plans to significantly ramp up its ‘Pick-Up-Drop-Off‘ facility across Britain and mainland Europe in the coming year. I believe that these earnings-sapping measures in the medium term promise to generate strong bottom line growth in coming years.
But can Primark save the firm’s bacon?
And while Primark looks set to remain a star at Associated British Foods, the strong performance here is merely offsetting problems at the firm’s other divisions. Indeed, group adjusted operating profit slipped 1% during fiscal 2014 to £1.2bn, particularly due to lower prices and currency movements at its AB Sugar division.
The firm warned that enduring woes in this area will crimp earnings growth during the current year, while I believe that further out, the positive effect of plunging commodities prices on its Grocery, Agriculture and Ingredients businesses could also peter out in the face of improving market sentiment. I believe that there are many moving parts to Associated British Foods which could offset success at Primark.