AB Foods profit marked up as Primark cuts back on discounting

Associated British Foods said group operating profits will be "well ahead" of last year after its Primark clothing arm was able to reduce levels of price promotion, with the sugar business also adding a hefty spoonful to the bottom line.

Agriculture profit in the year to 16 September are expected to be lower than last year due to strong competition and higher raw material costs in the UK and China feeds, while grocery profits are also expected to be down on flat revenues as margin decline at Allied Bakeries amid strong bread competition in the UK and inflation pressures.

AB Foods said that since upping profit guidance in July, Primark had enjoyed a period of even lower markdowns, so that adjusted operating profit for the group will be well ahead of last year.

With interest expenses at a similar level to last year, other financial expenses higher, the underlying tax rate higher than last year, overall investors guided to expect "good growth in adjusted operating profit and adjusted earnings per share for the group for the full year".

PRIMARK STORE EXPANSION TO SLOW

Sales at Primark, which opened 30 new shops across nine countries over the year to take its global total to 345 outlets, are expected to be 13% ahead of last year at constant currency, with like-for-like sales up 1% at constant currency or 20% when the effects of the weak pound are included.

The fast fashion chain performed well in the UK, where have risen by around 10% and market share increased, which analysts said implied that its share of the total clothing market has increased significantly.

Primark in the US opened its sixth, seventh and eighth stores during the year with the ninth due in Brooklyn next year as part of a planned 19 Primark openings around the world, which represents a 37% slowing of the pace of store expansion.

Profit margins at Primark shrank to 10% from 11.7% as the weak pound increased dollar input costs.

Sterling's weakness had a net £85m benefit for the group as a whole, as two-thirds of profits come from outside the UK, also notably sweetening British Sugar's margins, though over the courts of the next financial year margins are expected on balance to remain flattish.

SUGAR, GROCERIES, AGRI

Sugar revenues and adjusted operating profit from this year should be well ahead of last year on a comparable basis, with production of 1.65m tonnes versus 1.4m previously.

Looking ahead to 2017/18, the latest production estimate was given as 1.4m tonnes with EU sugar prices expected to be below those achieved in the current year, while the profit impact of this is expected to be somewhat mitigated by the higher production volumes and the benefit of euro strength against sterling on euro denominated sales. Beet costs will be in line with this year.

AB Agri revenues will be well ahead of last year with growth in all businesses and the benefit of a full year from acquired Danish protein business Agrokorn, though operating profits will be lower due to strong competition and higher raw material costs in the UK and China feed businesses.

Ingredients' revenues will be ahead of last year and operating profit will again be well ahead with a further increase in margin.

Grocery sales are expected to be flat with profits lower as supermarket own-label brands increase competition, particularly from discounters Aldi and Lidl.

Cash of around £650m is sitting in the bank, versus net debt of £315m at the end of last year, thanks to the sale of the south China sugar and US herbs & spices businesses.

ABF, which will report full year results on 7 November, also announced a small acquisition of one of the most celebrated makers of balsamic vinegar in Italy, Acetum Spa, which generated net sales of €103m in 2016.

ABF shares were down 2% in early trading on Monday to 3,199p, having hit a 12-month high above 3,320p at the end of last month.

It was a "strong" update, said RBC Capital Markets, driven by Primark, with fourth-quarter sales in line and margins ahead due to lower discounting over the summer.

"We don’t expect huge changes to consensus earnings forecasts today owing to ongoing grocery (bakery) margin pressure and a slightly worse outlook for sugar profitability for FY18, however we think the statement overall should be well received by investors given the trading momentum for Primark, ABF’s highest-rated business."

Trading for the other divisions was seen as mainly in line, though margins at Allied Bakeries were still a drag and because sugar profits are seen as being "slightly lower than anticipated", at circa €200m given pricing pressure in Europe mitigated by higher volumes and a favourable currency effect from the strong euro versus the pound.R

RBC estimated the Acetum acquisition cost around €300m.

Analyst George Salmon at Hargreaves Lansdown said that sugar looks to have rebounded nicely but Primark took centre stage again.

"The UK has been singled out as performing particularly strongly, which would normally have positive read-across for the rest of the clothing sector. However, this probably isn’t the case this time. We feel Primark’s good domestic performance is more a sign the UK consumer is tightening the purse strings and moving down the value chain as inflation outstrips wage growth.

"At the moment, over a million square feet of sales space is being added every year, and this roll-out story means ABF shares trade on a more premium rating than many of its peers."

Salmon felt US expansion is a key element to monitor. "Progress here looks good, but investors should remember that many other UK retailers have tried and failed to crack the notoriously competitive market across the pond.”