While other retailers have seen a sharp run-up in share prices over the past year, Primark owner Associated British Foods (LSE: ABF) is struggling. In the past three months, its share price has fallen 18%. It is also unchanged compared to the same time last year.
Its share price is weak even today, down by 2% as I write. This is despite its positive trading update released earlier in the day. And this is also despite that fact that the FTSE 100 index, of which it is a constituent, has made some gains from the last trading sessions today. So, a weak trading environment does not explain this trend.
Positive trading update
This sharp fall, though, makes it a relatively cheap share to buy in my opinion, though. Consider the details of the trading update, which has been released ahead of the end of its financial year on 18 September. The company starts out by saying that operating profit for the latest quarter for Primark is “anticipated to exceed our expectations”. It has high expectations for its food and sugar businesses as well.
As far as Primark is concerned, I like the consistency in its outlook. In its interim results released in April, ABF had expected the retailer to be cash generative in the future. It was also optimistic about its prospects. Based on its trading update, it is clear that it has indeed done well, at least in terms of profit. This indicates that its forecasts are on-point, which can be helpful in forecasting its share price.
Its sugar segment is also expected to continue benefiting from both higher demand as well as higher prices. It is also optimistic about the profits for both its ingredients and agriculture segments.
Why is the FTSE 100 stock falling?
So why is the ABF share price falling?
I think one important reason could be its retail business, which is a big revenue generator for the company in normal years. Primark has suffered through the pandemic. Non-essential retailers were closed for much of the time and there were stringent social distancing rules in place when they were open. As a result, footfall to the stores has been impacted significantly.
An uptick in sales was visible when the stores were reopened initially. However, ABF has reported a pullback in the last quarter. A reason for this is the spread of the delta variant. Besides this, in the UK self-isolation measures after coming into contact with infected individuals, also called the ‘pingdemic’ is also seen as a reason for lower sales. Limited opportunity for sales to travellers is another one.
That Primark does not sell online has also been a big downer for it compared to other FTSE 100 non-essential retailers like Burberry, JD Sports Fashion, and Next, whose share prices have made gains in the past year. The looming threat of another lockdown also impacts the stock more for that reason, I think.
What I’d do
All in all though, ABF has a lot going for it. And I do not believe that its present share price reflects this value. It is a long-term buy for me.