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Margins take sweetness off AB Foods update

Associated British Foods has upped its full-year guidance after a good performance at its Primark operation. However, margins are under pressure following sterling’s slide.

Garry White

in Features


Conglomerate Associated British Foods, which owns high street store Primark, as well as food operations including the Twinings tea, Silver Spoon sugar and Sunblest brands, raised its full-year guidance today.

In the year to the end of September, sales at Primark are expected to be 13% ahead on a constant-currency basis, driven by increased retail selling space and 1% growth in like-for-like sales. At actual exchange rates, sales are expected to be 20% ahead. This is great news. However, the shares were weak after the statement as margin pressure concerns came to the fore.

Primark sources most of its clothing from Asia and pays in dollars, so sterling weakness has increased import costs. In the first half of the year operating profit margin slipped to 10% from 11.7% in the first half last year. In its interim results, management explained that the full effect of sterling weakness would have a greater impact on margin in the second half because currency hedges maturing in that period would be at less advantageous rates.

However, the group now expects to see an improvement in the second half due to “input margin mitigation” and lower markdowns. However, the company also said it expected there will continue to be adverse effects on margin in the first half. Conversely, the euro's strength in the second half has had a beneficial effect on British Sugar's margin. Sales and profits at the sugar division are now expected to be “well ahead” of last year.

So, the weak pound is both positive and negative for the group. About two-thirds of its operating profit is generated outside the UK, so there should be a benefit in the order of £85m to operating profit this year due to currency effects and the strong euro helps its sugar business. However, it does hit margins in its home market.

UK consumers may be feeling squeezed, but they are still spending if a company gets its offer right.  In contrast to other major retailers such as Next and Marks & Spencer, Associated British Foods’ Primark operation appears to be firing on all cylinders – and customers are spending in its stores. Primark did very well in the UK where its share of the clothing market has “increased significantly”. AB Foods also said “favourable weather in the fourth quarter and the strength of our consumer offering resulted in markdowns at lower levels than normal”.

Primark is expanding internationally, with the group expecting to open its ninth store in the US in Brooklyn next year, as it continued to "fine tune" its range. In it next financial year, France, Germany and the UK will see the most space added, with 19 new stores opened, together with a number of relocations and extensions. The larger stores will be in Stuttgart and Munich in Germany; Toulouse and Bordeaux in France; and Antwerp in Belgium.

ABF said Primark performed “particularly well” in the UK, its home market, where sales are estimated to rise 10%, with its market-share in the clothing market increasing “significantly.”

AB Foods shares have been strong this year, as Primark continue to outperform, alongside other nimble and value “fast fashion” groups including Primark, Zara, Asos and BooHoo performing well. There may be some trouble on the high street – but the British consumer is alive and well. They are just getting more selective on what they buy and where they spend their cash.

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