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It’s right for store-only Primark to remain closed until Covid-19 is suppressed – despite the financial cost, says ABF chief executive

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Associated British Foods (ABF) chief executive George Weston today set out his support for keeping its Primark shops shut in the UK, US and Europe until Covid-19 has been suppressed.

Weston said that profits could be rebuilt in time, but people could not be replaced, as he acknowledged the deaths of two employees and set out how other staff in the business have been directly affected by the disease,

All of Primark’s shops are currently closed, as they and other clothing stores are classed non-essential under government guidance, and the retailer does not sell online. Sales of £650m a month have fallen to nothing, since the last of its stores closed on March 22, and 68,000 of its staff are on furlough, funded by governments across Europe.

“One of the world’s great clothing retailers is now entirely shut,” said Weston. “We have paid for in full, and taken delivery of, very large amounts of completed stock which we can’t sell for now, and we have established a fund that will ensure everyone in a vulnerable country who worked on a Primark garment, whether completed or not, is paid for that work. And we are supporting suppliers with commitments to buy garments that are as yet unfinished. But not until shops reopen and we can place new orders, will the economic hardship that Covid-19 has caused to all those in our supply chain reduce.”

Weston said: “Much as I would love to be allowed to reopen Primark stores across the UK, Continental Europe and the USA soon, because lockdown has so harmed our business and our supply chains, I know that we must not do so until we have suppressed this disease. And when we are allowed to reopen we must make our Primark stores safe for our staff and our customers, even if that means ensuring there are fewer people shopping at any one time and so accepting lower sales at lest until the remaining risk is minimal. In time we can rebuild the profits. We can’t replace the people we lose.”

Even once Primark shops do open, they will need to be safe for staff and customers, he said, “even if that means ensuring there are fewer people shopping at any one time and so accepting lower sales at least until the remaining risk is minimal. In time we can rebuild the profits. We can’t replace the people we lose.”

While its retail business is quieter than ever, ABF’s food business is busier than ever, with production running at record levels during the period in which UK shoppers stockpiled ahead of lockdown. 

Pre-coronavirus financials

Weston’s words came as ABF released first-half results. The figures, which cover a period before coronavirus hit, show group revenues of £7.6bn in the 24 weeks to February 29 – 2% up on the previous year. Adjusted pre-tax profits, before exceptional items, came in at £636m, 3% up on last time. But at the bottom line, pre-tax profits of £298m were 41% down on last time, hit by exceptional charges including £284m related to the fast building of excess stock – worth £1.5bn – at Primark following store closures and £25m related to the loss of its Speedibake factory in Wakefield, which was destroyed by fire on February 1. 

Before the outbreak of coronavirus, like-for-like Primark sales in France, Italy and Northern Ireland were positive, although UK sales had weakened in January and February after performing strongly in November and December. UK sales were 2.7% up on last year as the retailer added new space, but like-for-like sales were down by 1.7%.  

Retail sales for the half-year came in at £3.7bn, 2% up on a year earlier. Operating profits of £441m were down by 2% on last time when set out in the new IFRS 16 format, but up by 4% compared to the pre-IFRS format, which was in place a year ago. When Primark shops shut in March, the retailer agreed to pay £0.6bn for stock in transit. Now it is holding inventory of £1.5bn. 

“With no sales in its stores and with this level of inventory, it was essential to prevent further cash outflows,” said ABF in today’s half-year results. “We have committed to take all product that was both in production and finished, and planned for handover by 17 April. Future orders were cancelled until further notice. We have carefully reviewed stock on hand and, to reflect an expected lower net realisable value on some of this inventory when our stores reopen, we have made a £284m provision.”

Primark’s total costs have now been reduced to about £100m a month while the stores remain closed. Primark clothing is also being donated to hospitals across Europe, including the Nightingale Hospital in London, so that staff have clothing available at the end of their shifts. The retailer says it is establishing funds to protect workers affected by order cancellations, and working with other other retailers to ask their suppliers’ governments to help them.

Commenting on the figures, Weston said: “The group delivered an encouraging trading performance in the first half. The rapid spread of Covid-19 has impacted all of our lives and the human tragedy that continues to unfold has shocked and saddened us all. We are a strong, diversified and resilient group. Our people are working hard to maintain supply from our food businesses. Primark is managing through an extraordinarily challenging period after all of its stores closed in March and our management response to mitigate the cash outflows was swift and proportionate. Although uncertainty remains, we have the people and the cash resources to meet the challenges ahead.” 

In ABF’s grocery business, revenues of £1.7bn were 1% down on a year earlier, while adjusted operating profit on an IFRS comparative was up by 13%. Sales rose at brands including Twinings, Blue Dragon and Patak’s, although Ovaltine sales were held back and its bakery business was hit by a fire at Speedibake Wakefield in February.

ABF’s board is to take temporary pay cuts, with executive members seeing pay cut by 50% and non-executives seeing their fees fall by 25%. No interim dividend will be paid. 

Image courtesy of Primark

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