Shares in grocery-to-fashion firm Associated British Foods (ABF) were the worst performers in the FTSE 100 index on Monday after it released a disappointing pre-close trading update for the year to mid-September.
While the forecast for current-year earnings was unchanged, investors were rattled by the news that Primark expects ‘a reduced margin’ in the coming year due to the recent strength of the US dollar against the pound. Shares fell 2.4% to £22.97.
Primark’s US business has been growing strongly and more stores are being rolled out. While a weak dollar in the first half of the year helped to boost US operating margins, a stronger dollar in the last six months has had the opposite effect.
The strong dollar has also increased the cost of goods for next year, and although some raw material prices have fallen, which will offset part of the negative impact, factoring in a ‘more typical level of markdown’ means that 2020 margins will be lower.
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Trading across the group in the 12 months to September was mixed with a strong performance at Primark, Grocery, Agriculture and Ingredients offset by a decline in the Sugar business.
PRIMARK ROLL-OUT CONTINUES
Total revenue at Primark was up 4% with increased selling space partially offsetting a 2% fall in like-for-like sales. UK sales grew by 3% with a 1% fall in like-for-likes against a very weak UK market while in Europe sales were up 5% although there was a dip in like-for-likes in Germany.
A new Primark store was opened in Slovenia and next year the firm opens its first store in Poland. Most of next year’s openings will be in the later part of 2020 which has helped with cash flow and boosted this year’s net cash pile to c£900m.
FOOD ADDING VALUE
The Grocery business – which owns well-known consumer brands like Jordans, Mazola, Ovaltine, Ryvita and Twinings – increased its revenue last year and adjusted operating profit is expected to be ‘well ahead’ of the previous year thanks to better margins in Australia and the US.
The Agriculture and Ingredients businesses also grew their revenue last year thanks to higher feed volumes and prices on one hand and higher yeast prices on the other.
However the Sugar business, a perennial fly in the ointment, saw revenue and profit fall last year as lower EU prices hit its UK and Spanish operations and a poor crop affected sales in China.
Lower sugar production last year is likely to continue this year, which isn’t great for volumes but should at least help to underpin prices as sugar stocks remain relatively low.