Primark shopping bag
Profit margins at fashion chain Primark are expected to recover strongly next year / Image source: Adobe
  • Operating profit forecast nudged higher
  • Primark shows resilience in face of unseasonable weather
  • ‘Substantial’ profits improvement expected in sugar

Associated British Foods (ABF) was the FTSE 100’s biggest riser on Tuesday, the shares gaining 5.9% to £21.19 after the global food, ingredients and retail giant nudged up operating profit guidance for the year to 16 September 2023 on the back of a better-than-expected performance from its sugar business, which is set to see a ‘substantial improvement’ in profitability in full year 2024.

The Weston family-controlled conglomerate also expects adjusted operating profit margins at its discount fashion arm Primark to ‘recover strongly’ in the next financial year due to falling material costs, the weakening of the US dollar against the pound and the euro and lower freight costs, all of which have improved in recent weeks.

CUT-PRICE CLOTHING SELLER SHOWS RESILIENCE

Sales for full year 2023 at budget retail brand Primark are expected to be around £9 billion, up 15% year-on-year with like-for-like growth of 9%, driven by higher average selling prices, well received ranges and strongly-performing new stores.

Like-for-like UK sales for the fourth quarter are expected to be up 7%, a resilient performance considering the wet summer and hot September which impacted transactions and footfall at the expansionist clothing and accessories seller, whose margins have been impacted by episodes of in-store theft.

In Europe excluding the UK, fourth-quarter sales are expected to be 18% higher with like-for-like sales expected to be up 9% despite ‘especially hot conditions’ in several regions across the continent.

In the US, Primark’s sales are expected to be 45% higher in the fourth quarter driven by the chain’s aggressive new-store opening programme.

SWEET PROGRESS

Associated British Foods continues to see ‘strong’ sales growth in its food businesses, particularly in grocery and ingredients, with international brands such as Twinings, Ovaltine, Blue Dragon and Patak’s continuing to perform well in the fourth quarter.

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The company also expects its sugar arm to make a ‘substantial improvement’ in profitability in the next financial year driven by a marked improvement in the performance of British Sugar, an anticipated better UK sugar beet crop and a significant reduction in losses at the group’s Vivergo bioethanol plant.

EXPERT VIEWS

Following the update, Liberum Capital maintained its ‘buy’ rating on Associated British Foods with a £24 price target.

The broker pointed out the company has ‘passed through the worst of cost inflationary pressures and various factors are aligning that should drive a period of significant earnings growth. These will entail margin recovery at Primark, grocery and sugar with continued strong performance in ingredients.’

Russ Mould, investment director at AJ Bell, explained that after two years of growing cost pressures, ‘these negative factors on the business have started to reverse. Think raw material and freight costs which should lead to better gross margins for its Primark retail chain.’

Mould continued: ‘While there have been some hiccups along the way, such as unfavourable weather conditions in several geographic territories which has hurt footfall to its shops, the outlook for Primark continues to be favourable.

‘It is rolling out more shops, expanding a click and collect trial to include more products and it is pushing up prices where possible.

‘Even the non-retail parts of its business are generally doing well, with the company reporting brighter prospects ahead.’

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Ian Conway) own shares in AJ Bell.

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Issue Date: 12 Sep 2023