A post-Christmas update from Associated British Foods PLC (LON:ABF) showed its Primark chain bucked the terrible trend for the retail sector over the crucial festive period.

Even more impressive was that Primark does not sell online, while the group this year looks set to enjoy a further sprinkle of sweetness on top from a return to growth for its AB Sugar arm.

READ: Primark’s Xmas sales firm but AB Foods enjoys sugar rush

While worries about Primark’s performance has led to AB Foods’ shares currently sitting 25% off their all-time from a few years ago, the November and December trading throws considerable shade on the weakness seen elsewhere on the high street.

Primark saw just a “marginal decline” in UK like-for-like sales in the 14 weeks to 4 January, which compares extremely well with the sector’s deterioration in yuletide selling.

Outperforming the sector

From Primark’s fast-fashion rival Quiz (LON:QUIZ), which reported a 9.3% fall in festive sales, to larger mid-market peer Next’s (LON:NXT) 3.9% decline, there was a severe struggle for the clothing retail sector at the end of 2019.

The worst was perhaps Superdry (LON:SDRY) warning on profits after sales since Black Friday slumped 15.8% while, not to be outdone, N Brown (LON:BWNG) issued a two-year profit warning after a 5% revenue reversal.

Across the whole sector, the British Retail Consortium calculated December non-food sales were down 1.4% to make it the worst year on record for the UK high street.

However, Primark was not the only fashion fruit for UK shopper, with a few others attracting rising numbers, including online rising star Boohoo (LON:BOO) and athleisure experts JD Sports (LON:JD.), while Marks & Spencer’s (LON:MKS) reported negative clothing sales but showed a commendable improvement since the first half despite issues with availability and skinny jeans.

High Street star

That’s not to say ABF’s retail arm did not enthuse investors and analysts, with its shares climbing more than 3% to 2,649p.

“What’s most striking about Primark is it’s essentially an old school retailer,” said Sophie Lund-Yates at Hargreaves Lansdown.

“Lack of a meaningful online business makes the chain a high-street play, so the improvement to sales performance is even more impressive.”

Taking into account increased selling space in the UK, total sales for Primark were up 4.0% in the quarter.

Primark’s diminutive decline compared to rivals means it is snatching ever more market share, said analysts at Shore Capital.

World of wonder

Global sales for Primark were 3% ahead of last year, or 4.5% if currency swings are ignored, which was driven by a “marked upturn” in Europe, as well as a move into Eastern Europe, with Slovenia exceeding expectations, stories in Poland and the Czech Republic coming this year and a lease signed in Slovakia to take Primark into its 15th country.

Total Eurozone sales were up 5.1% and LFL sales were positive, having been down 3% in the past year.

It was music to the ears of ShoreCap analyst Darren Shirley: “We see this as more positive commentary than both our and consensus expectations. We are particularly encouraged by the early-stage comments of ‘a notable improvement in Germany’.”

The US was also reported to have enjoyed LFL growth and while there “precious little detail” on this, Neil Wilson at markets.com said: “A UK business finding the US a tough nut to crack is a cliché that ABF is trying hard to avoid.”

While operating profit margin declined in the quarter, this was driven by stock purchases being contracted at a stronger US dollar rate, which was partially offset by cost reductions in both the cost of goods and overheads.

How long Primark can continue to shun the digital world continues to be a question pondered by investors and analysts alike, especially when Boohoo is showing that cheap and cheerful can be a success online.

“It will be interesting to see how long Primark sticks to [its high street-only] plan,” says Lund-Yates, “at some point it will start to bump against the sides of the tank.

“For now though, there’s clearly still real demand for what’s on Primark’s shelves, and the newer stores are doing what they set out to do for the business.”

Sustainability a problem on the horizon?

In the non-food arena ShoreCap said in a note this week that its winners so far included Boohoo, JD and M&S.

One of the key themes the analysts picked up, would seemingly not be helpful to Primark because of past criticism about ‘fast fashion’.

Analyst Greg Lawless said a theme that had become more mainstream was the “fusing” of wellbeing and sustainability.

“The prime market output of this fusion is that consumers are reassessing their buying habits with fewer inputs and lower output, meaning less products being bought in total.

“We have termed this ‘more precision’ in what shoppers are actually purchasing, a development that is particularly relevant for non-food retailers,” he said, though he did not mention Primark by name.

Lawless perceived “a sea change in attitude and perception with consumers balancing the need for and minimising wastage and the issue of sustainability coming to the fore”, resulting in a boost for higher-end retailers, M&S cashmere jumpers and other signs of a “flight to quality”.

More positive long-term views

However, for Liberum’s Anubhav Malhotra the not-so-secret of Primark’s success is not likely to be diminished for the coming decade.

As he explains it, the proposition of “the latest fashion at value-for-money prices, sold at large well-managed stores located in high street and shopping centres, allows it to outperform the market, particularly at these times of political and macro uncertainty when consumer is keeping its expenditure in check”.

Malhotra says the shares offer investors “compelling exposure to secular growth trends in retail over the next 10 years”, rating ABF a ‘buy’ with a 3,070p target price.

Credit Suisse says the current share price values Primark at a discount of around £10bn – “significantly undervalued vs H&M and Inditex”, with outlook for retail margins likely to benefit from sterling strengthening.

Investors and analysts all seem to be reassured by Primark’s burgeoning presence overseas, with France and Spain in line to see the most space added in the current year, with two new stores planned in the US.

This touches on the ‘buy’ argument for ShoreCap’s Shirley, who says that Primark is “still immature across many of its existing markets, with a working template through which it is accelerating growth in the USA and the positive early signs in Central/Eastern Europe”.

He also highlights an anticipated £1.4bn of cash on the balance sheet “to support corporate ambitions or something more out of the box for ABF”, such as a possible capital return.

“High quality, with a very well invested portfolio of brands and assets across categories and geographies, we view ABF as a core long holding in the UK consumer arena,” Shirley says. 

On top of that, the conglomerate’s offers something that no other retail investor can get access: its AB Sugar business is on track to benefit from a “material improvement” in sugar profit this year.