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Difficulties in AB Foods’ sugar business to offset better-than-expected profits at Primark

A weakening dollar, coupled with better buying and fewer-than-expected sales mean margins will be “well ahead” in the second half, which should lead to higher profits at the value fashion chain
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Primark is the jewel in AB Foods' crown

Associated British Foods plc (LON:ABF) expects profits in its Primark business to be higher than expected this year but kept its overall guidance on hold as its sugar division continues to battle falling prices.

It is not the first time that the value fashion chain has bucked the UK retail doom and gloom, despite the fact it still has no online presence.

READ: New Look’s troubles could help drive sales at Primark

Primark’s low-cost clothes and accessories have proved to be a real hit in recent years, particularly as higher inflation and stagnant wages squeeze household incomes.

Sales in the 40 weeks to June 23 were up 7% compared to the same period last year, driven by new store openings and increased overall selling space.

There was a surprise decline in like-for-like sales in the first half (-1.5%), but AB Foods said they have improved as the year has worn on driven by better trading in Europe.

No exact figure was given but analysts at UBS expect like-for-likes to fall by around 1% this year, albeit against some tough comparatives.

Primark is increasingly looking to unlock the potential across the pond in the US where it has been “encouraged” by the trading from its handful of stores.

Margins picking up

Operating margin during the 40 week-period was broadly flat at 9.8% (2017: 10.0%) with the stronger US dollar offsetting better buying.

That said, margins in the second half should be “well ahead” of the first half and last year as the effects of a strong US dollar drop out.

Primark has been tightly managing its stock, while markdowns – promotions, discounts, sales etc – will be better than expected, too.

“As a result, the profit from Primark will now be higher than expected,” read this morning’s update.

Sugar weakness to offset Primark growth

AB Foods’ overall outlook for the year is unchanged though as difficult trading in its sugar business offsets the profit growth at Primark.

An excess supply of the sweet stuff means sugar prices are declining, as they have been for some months now, and AB Foods does not expect that to turn around any time soon.

AB Sugar’s sales in the third quarter were down 17% and it expects to see another “sUBStantial reduction” in sales next year.

“As a result, our expectations for sales and profit at AB Sugar, both for this financial year and next, are lower than previously expected.”

Group sales up 3%

For the 40 weeks to June 23, group revenues were 3% ahead of the same period last year at constant currency rates. Excluding the sugar divisions, sales were up 6%.

“For the full year we expect good profit growth in Grocery, Agriculture and Ingredients,” read Thursday’s update.

“Compared to our previous expectation, we now expect a reduced profit from AB Sugar as a consequence of lower EU sugar prices and an increased profit from Primark driven by higher margins.”

“As a result, our full year outlook for the group is unchanged with progress expected in adjusted operating profit and adjusted earnings per share.”

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