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Stock Watch: Primark-owner AB Foods and Morrison’s Supermarkets

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

For a company to be reliant on the retail side of its business to pull it through in the current climate is saying something. But when Associated British Foods (ABF) needs to offer something of a sweetener to keep its shareholders happy, that’s it’s best bet. It’s certainly not likely to have anything sweet to show from its sugar business.

There’s no denying that AB Foods is a bit of an oddball - a mini conglomerate with one foot in fast fashion and the other stuck fast in the sugars and sweeteners world. The fact that Primark, its retail brand, is the better of the two says it all.

The retail scene is dire right now and even lower-end throwaway fashion retailers have shown they’re struggling, as we saw when Quiz (QUIZ), the cheap and cheerful online fashion brand issued a warning on sales and ever-weakening footfall this week.

So that doesn’t bode well for Primark, which undoubtedly relies on shoppers popping into its stores and picking up something new to wear.

But maybe Primark has something other retailers don’t, as it continues to pick up market share.

Back at the start of July it said it expected 'good' growth from the fashion brand, even as the retailer's like-for-like sales were held back by 'unseasonable' weather in May. Primark saw sales rise 4% in the year-to-date compared with last year, driven by increased selling space.

That’s better than many retailers are managing. We’ll have to see what it says when it gives a trading update on Monday.

On the other side of retail in the supermarket sector, the latest figures published by Kantar, show year-on-year supermarket sales were flat during the 12 weeks to 11 August 2019 as the tough comparisons with 2018’s strong summer continue.  

The memory of last year still looms large for retailers and this summer’s comparatively poor weather, combined with low levels of like-for-like price rises, have made growth hard to find for retailers.

July’s hottest day on record wasn’t enough to shift the market into growth, but the grocers will have been encouraged by glimpses of better weather during the past four weeks which helped boost sales of summer staples like hayfever remedies, suncare and burgers by 17%, 8% and 5% respectively.

But there’s no denying that these are also challenging times for all the major grocers, with growth slowing at every supermarket except Ocado (OCDO). The main factor behind the sales drop-off is shoppers heading out to stores less often. Kantar says that last year people shopped more frequently and closer to home as they topped up the cupboards as they enjoyed the sunshine and the men’s football World Cup. This year households are making one fewer trip, which may not sound like much but is enough to tip the market into decline. In addition, like-for-like grocery inflation fell marginally to 0.9%, which is good news for consumers but has made it harder for retailers to achieve value growth.

The difficulties in emulating last year’s performance are evident when looking at traditional summer categories. Most notably, consumers spent £75 million less on alcohol this summer compared to last year, with beer down 11% and cider down 13%. Soft drinks sales fell by £56 million and ice cream by £55 million. However, the cooler weather gave confectionery a chance to shine as it racked up an extra £68 million of customer spend. Chocolate in particular grew by 15% as shoppers enjoyed a treat without having to worry about it melting. Despite the tough climate, branded goods also fared slightly better than the overall market, increasing sales by 0.2%. 

Sales at Morrisons (MRW), which posts half-year results on Thursday, and which is already selling more items through deals than any other retailer, saw its overall sales fall by 2.7%, according to the latest data. A reduction in the number of items bought per trip contributed to this decline and its market share has also fallen to 10.1% over the past 12 weeks.

However, broker Investec isn’t convinced its something that is going to hamper the supermarket group long term. It’s also confident that Brexit won’t have a long-term impact on Morrison’s either.

In fact it has just upgraded Wm Morrison from “hold” to “buy” and set a 240p target price on the shares as part of a UK supermarket sector review.

In a note the broker said: “Having reviewed the possible impact of Brexit-driven changes in consumer spending patterns, tariffs and supply chain disruption, we believe that the current weakness in the supermarket sector is unwarranted. While there is currently undoubted nervousness on companies with large UK exposure, we still feel the sector offers compelling value.”

The broker also dismissed trade tariffs as a manageable expense, estimating an extra cost of £2.54 a week on the £66 average weekly spend on groceries. Supply chain disruption was a concern though, it said, with almost half of the UK’s food supplies at risk, but European suppliers are just as invested as UK buyers in finding a solution and any hit to supermarket revenue was likely to be temporary, Investec said.

And Investec isn’t alone. UBS has just repeated its buy investment rating on Morrison’s although it has cut its price target from 260p to 245p.

Berenberg also rates the shares a buy but has cut its price target from 265p to 230p. While Jefferies International remains the most bullish, with a buy rating and a 255p target on the shares. They’re currently trading around 182p.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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