ABF essentially pre-reported the core issues with the Full Year results a month ago, so there really shouldn't have been much to worry about. However, one thing that could make investors think is the Primark number. Back in September the management stated that they expected c.4.5% l-f-l, so the fact that they delivered 4% may just be disappoint. New stores/space is good news, and the new stores in the USA will be taken well, but as we have seen from every other general retailer recently, odd weather patterns have impacted short term sales. Normally this wouldn't worry us, but at ABF we have a great Company on c25x, given that Sugar has some well known short to medium term issues, and that the Grocery and Agriculture businesses wouldn't register a particularly large PE, then Primark really does need to perform. We have long thought that Primark is a binary call, if they find a large block of stores then you just Buy the stock, opening seven in the USA isn't enough to make that call. It looks as though 2015 will have 2 new stores at the moment, compared to the current 278, not enough to be a buyer of the stock.
[Bold mine as always]
Duncan was perplex as I by the stock uplift this morning, which I believe is as a result of shorts closing. Quite why certain parties (they know who they are) were short ABF for the news is beyond me. The update in September (pre-close trading update) was going to be no different to the annual results...Perhaps had the short parties decided to stay in a little longer they would make be well in the money by January?
Atb Fraser
Entry strategy into the US is always fraught. I guess the four (/five) big retailers from the UK that I can recall who moved to the US had mixed results:
ReplyDelete(1) M&S - bought Brooks Brothers - failed and eventually sold it off
(2) Tesco - organically built Fresh and Easy - failed and the remnants sold to private equity (Yucaipa Companies)
(3) Top Shop - limited stores in the US but by all accounts doing well - organic build
(4) Primark - now entering US on an organic basis
[(5) Asos - initially supplied from the UK and then set up some US operations (limited)]
I think there is no hard and fast rule on whether acquisition or organic growth is better. I think it depends on the business (I did think in the grocery business, Tesco would have been wise to acquire a regional chain to get some infrastructure).
For TopShop I would suggest that the 'flagship' stores would also draw attention to its website and increase its online sales. Interestingly in this context the Primark website has a completely different look and feel to the TopShop website and really does not invite online shopping.
My conclusions / thoughts:
(1) Are the Primark stores in the US going to be flagships that drive traffic to the website? (My suspicions are that the demographics and the business model is not conducive to this)
(2) A lot of Primark product is, I would suggest, 'impulsive' buys - driven by immediate availability and attractive prices (so low that you won't be upset if the clothes don't quite fit or don't last as long)
(3) As a result I would suggest the model really works on the basis of large floorspace in relatively secondary high street locations (eg the Primark store might be at the end of a highstreet rather than smack bang in the middle (as a M&S would be)); with lower staffing per sqft than its competitors
(4) I wonder how close the model will be to a KMart, Target, JC Penny or indeed Walmart and what the competitive intensity will be in the US
(5) How much scale does Primark need to help drive its prices low and maintain its differentiation in the US?
(6) Can it do a smart deal with one of the department store or other tired US retailers (such as the ones mentioned above) to take some of their space on a risk sharing basis? (I note Fraser mentions 'if they find a large block of stores' - would be even smarter if they could share the capex risk with someone).
roddy