- Warm weather weighs on Q1 sales
- Primark sales growth slows to 7.9%
- But ABF still confident of profit progress
Following a slow start to its important first quarter period, Christmas saved the day for Associated British Foods’ (ABF) retail arm Primark, the jewel in the foods-to-fashion conglomerate’s crown.
Shares in Associated British Foods nudged up 1.5% to £22.99 after the company reported a solid 5.4% rise in first quarter group sales to £6.89 billion.
The FTSE 100 giant also said it expects to make ‘meaningful progress’ in profit and cash in the year to September 2024, prompting Shore Capital to upgrade its pre-tax profit forecast by 3.5% to £1.79 billion.
GROWTH SLOWS AT PRIMARK
Unfavourable weather conditions hurt the retail sector in the latter part of 2023, leaving shopkeepers with unsold jumpers and coats as unseasonably warm weather meant consumers weren’t compelled to buy what was on the shelves.
Associated British Foods insisted trading at Primark was ‘good overall’ in the 16 weeks to 6 January 2024 with sales up 7.9%, although the period saw ‘a slow start given the unseasonal warm weather’, followed by ‘strong Christmas trading’.
The discount clothing chain’s like-for-like sales were up 2.1% in Q1, a sharp slowdown from the 8% growth in the previous quarter, supported by higher average selling prices and a strong line in Christmas-themed clothes which helped Primark avert a festive disaster.
Encouragingly, the cut-price clothing chain’s UK market share reached a new record at 7.1% for the 12 weeks to 10 December.
Primark’s Christmas performance in Europe was mixed with some countries trading well and others impacted by a combination of strong prior year comparatives and local economic conditions.
In the US, a land of huge opportunity for the chain, Primark’s first quarter sales grew by 45% driven by new store openings.
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GROCERY GAINS
Elsewhere within the diversified conglomerate, performance was slightly mixed with sales down double digits in the agriculture arm, not helped by weak demand for animal feeds, but up in both the sugar and grocery divisions.
The latter benefited from strong Christmas demand with management calling out continued strong performances from the Stratas joint venture in edible oils and the Twinings brand, which traded well across key markets.
Associated British Foods assured investors it continues to look forward to ‘a year of meaningful progress in both profitability and cash generation, with the profitability improvement being driven by a recovery in Primark margin, a marked improvement in British Sugar profitability, and by reduced losses at Vivergo.’
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould said there are ‘still challenges to overcome’ for Primark, with consumers still feeling the pinch from higher interest rates and proving more cautious with how they spend money.
‘The weaker demand equation is widely known and so success is being judged on the ability to sell clothes without resorting to heavy discounts and to take market share off rivals. Primark is doing everything it can to tick off these boxes.’
Mould continued: ‘Ongoing store expansion means Primark has more opportunities to earn money and it believes margin improvements give it some breathing space should disruption in the Red Sea lead to supply cost inflation. Given the fragile backdrop, parent company Associated British Foods should be sitting more comfortably than most other retailers.
‘A key thing that works in Associated British Foods’ favour is its conglomerate structure, with interests in grocery, ingredients, agriculture and sugar helping to provide some ballast to the retail arm. If one of the arms is lagging, there is support from the other businesses and it’s always been that way, hence why the company is quick to shoot down any suggestions it should demerge Primark amid the argument it could be worth a lot more as a standalone business.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
