ABF Associated British Foods Plc

By Nina Trentmann 

Associated British Foods PLC is cutting costs and relying on government assistance to protect its balance sheet while its Primark fashion stores are closed during the coronavirus pandemic.

Primark, which accounts for about half of ABF's earnings before interest and taxes, doesn't have an online store and depends on foot traffic to generate sales.

"If all of your stores are closed, your sales are zero," ABF finance director John Bason said in an interview Thursday. "The focus is very much on cash flow and on cash going out."

London-based ABF said Monday it closed all 376 Primark outlets in 12 countries and forecast a net sales loss of about GBP650 million ($811 million) a month. It is unclear how long the store closures will last, but Mr. Bason expects ABF to recover about 50% of operating costs through subsidies, negotiations with landlords and other measures.

Wages for about 78,000 employees make up the bulk of Primark's operating costs of about GBP220 million a month, and government assistance programs launched in response to the crisis will cover about 75% of salary costs in Europe, Mr. Bason said.

Under these programs, governments in the U.K., France, Italy, Spain, Germany and other European countries pay companies around 75% to 80% of salary costs for employees who are not working because of the coronavirus, assuming that employees retain their jobs, according to recent announcements by various governments.

"This can lead to significant cost savings during the period of store closures," analysts at Berenberg Bank said in a note to clients.

The financial relief from these job retention programs will come with a certain delay; many governments haven't specified when they would start making payments, said AllianceBernstein LP analyst Aneesha Sherman. "At the moment, retailers still have to front wage costs," she said, estimating that ABF's Primark operations in the U.K. could expect to get funds from the government by the end of April.

ABF said this week it has cash resources of about GBP800 million and a revolving credit facility of GBP1.1 billion, bringing its total available liquidity to about GBP1.9 billion. Mr. Bason declined to comment on whether the company would seek additional loans or other types of funding in the coming weeks.

"They can survive the quarter without additional funds," Ms. Sherman said.

The company is negotiating with its landlords to reduce rent obligations, Mr. Bason said. Those efforts could result in a permanently lower cost base for Primark, said Ms. Sherman, adding that competitors Next PLC and H&M owner Hennes & Mauritz AB are pursuing similar efforts.

A decision by the U.K. government to exempt retail, leisure and hospitality businesses from paying business rates -- a form of property tax -- also helps the company, Berenberg analysts said.

ABF stopped placing new orders with its suppliers, but pledged to pay for goods already en route to Europe. "We said, 'Don't produce anything more for us,' " Mr. Bason said. Primark has about 1,000 suppliers globally, including 600 in China, he said.

Clothing retailers such as Zara-owner Inditex SA and Boohoo Group PLC have taken similar measures.

"It is the right decision, because otherwise you have large amounts of inventory that would bind a lot of working capital," Ms. Sherman said.

ABF benefits from having other businesses, including food and sugar production. The grocery unit, which makes products such as Twinings tea and Patak's sauces, has seen stronger demand in recent weeks, Mr. Bason said.

"What we have seen is a big shift to home cooking," he said, noting that it's too early to tell whether the grocery business could help offset losses at Primark.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

March 27, 2020 16:42 ET (20:42 GMT)

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