Primark owner ABF reveals £284m charge for unsold stock
Associated British Foods (ABF) has revealed a £248m hit for unsold stock as sales plunge while Primark stores remain shut across Europe.
Following the closure of its stores the level of inventory at Primark increased significantly as sales ceased immediately and the inbound supply chain continued for several weeks with goods in transit.
An assessment of the carrying value of this inventory has resulted in an exceptional charge of £284m.
Primark sales have plunged from £650m a month to zero as coronavirus restrictions forced the 376-strong chain to shut completely, with no online business to fall back on.
However ABF said it has committed to take all product that was both in production and finished. It comes after the high street giant faced criticism for cancelling orders during the lockdown and agreed to pay an extra £370m to suppliers.
Cost-cutting measures
The main uncertainties are considered to be the length of time for which Primark stores will remain closed and the strength of trading once they reopen. ABF has taken the conservative view that stores will remain closed until the end of the financial year and sales will take some time to re-establish.
The Primark owner said it intends to access government programmes to provide income for employees no longer working. It is also seeking discussions with other counterparties, notably landlords, for help with lease payments.
ABF said the cost-cutting measures, paired with business rates relief, will allow it to recover some 50 per cent of Primark’s total operating costs. It will leave ABF with a monthly cash outflow of £100m, while stores remain shuttered.
At the half year, the firm had net cash of £801m. As a “precaution” ABF drew down its revolving credit facility of £1.08bn at the end of March.
ABF performed well in the half year to 29 February, with revenue up two per cent to £7.6bn. Adjusted profit before tax increased one per cent to £636m and adjusted operating profit rose seven per cent to £682m. The firm will not declare an interim dividend.
ABF’s food businesses, which continue to operate, are facing operational challenges as demand significantly increases. The firm said it expects the aggregate operating result for its sugar, grocery, ingredients and agriculture businesses in the second half to be unchanged.
Richard Hunter, head of markets at Interactive Investor, said: “AB Foods has produced a measured response to the effects of the pandemic, battening down the cost hatches wherever possible and consolidating those parts of its business where some sort of earnings visibility is still possible.”
Shares are down six per cent.