Primark’s owner today said it was considering ramping up production from suppliers outside of China in a bid to avoid a hit from the coronavirus outbreak.
Associated British Foods (ABF) expects Primark will drive higher operating profit and sales for the six months to the end of February compared to the same period a year ago.
But it warned the coronavirus outbreak has led to reduced production capacity at some food factories as the company said it was “closely monitoring” its exposure to supply chain problems.
US grows as retail sales keep ABF on track
Primark is set to enjoy a 2.5 per cent rise in sales, driven by more retail square footage and level like-for-like sales.
However, the UK experienced a 1.3 per cent fall in like-for-likes, though overall sales are set to be three per cent up on last year thanks to larger selling spaces.
“Trading was particularly good over November and December but weakened in January and February against very strong comparatives in the prior year,” ABF said.
Eurozone like-for-like sales edged up half a per cent, driven by an “excellent” performance in France and Italy. And Primark continued to expand in the US, boosting like-for-like sales to the extent that ABF expects a “much improved” operating result this year.
An expected second half profit recovery in ABF’s long-suffering sugar business also helped the FTSE 100 company stick to its full year guidance.
Coronavirus impact on Primark unknown
However, ABF’s share price dipped 2.3 per cent to 2,525p in early trading as it warned Primark was reliant on supplies from China.
ABF said that unlike other British brands like Jaguar Land Rover, it does not expect any short-term supply disruption due to high stock levels.
But it added: “We are working closely with our suppliers in China to assess the impact on their factories and supply chains and their ability to fulfil our current orders. If delays to factory production are prolonged, the risk of supply shortages on some lines later this financial year increases. We are assessing mitigating strategies, including a step up in production from existing suppliers in other regions.”
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said Primark’s reliance on cheap Chinese imports could hurt the retailer.
“The good news is the group has existing suppliers in other regions, which could be called on to plug any holes in the production line,” she added.
“The net effect is Primark is well placed to handle near-term disruptions, but it’s one to keep an eye on.”
“News of continued progress in the US will have been well received,” she added. “Primark can only grow so big in the smaller UK market, making international success increasingly important.
“Overall Primark continues to buck the bleak high street trend. Coronavirus is a potential headwind, but as a dynamic situation it’s too early to say how things will turn out.”