AB Foods confident despite sugar slump staining Primark gains

Associated British Foods reported a 3% increase in revenues in recent weeks, as strong growth from its Primark clothing retail arm was held back by a worse than expected decline in sugar.

For the first 16 weeks of its financial year to 6 January, AB Foods saw sales at constant currencies grow at four of its five limbs, but only sugar in negative territory as revenues dropped 13% due to significantly lower EU sugar prices.

Sugar revenues and profits are now expected to reduce more than previously forecast as the UK and Spanish businesses are hit by the end of the EU sugar regime on 30 September, resulting in the end of sales quotas and the removal of constraints on exports.

Management still were confident in the full year outlook for the group as a whole, not changing previous guidance that 2018 will see "progress" in adjusted operating profit and adjusted earnings, though the exact degree remains unquantified.

Sales at Primark were up 9% in the quarter or 7% at constant currencies, though this was a big slowdown from the 19% and 12% seen in the past full year. Growth was driven by an increase in selling space as five openings and two relocations took the total to 350 stores, with 0.3m sq ft added in the quarter to lift the total to 14.2m sq ft from 13.1m a year ago.

Operating margins for the half-year are now expected to be "close" to those seen in the first half last year thanks to better buying.

Primark UK was said to have seen "strong like-for-like sales" and therefore a "strong increase" in market share, though sales growth was held back across Europe by unseasonably warm weather in October.

The five weeks leading up to Christmas saw a return to "good trading" for Primark with record sales in the week before Christmas. Trading in the US was said to have "continued to make progress".

Agriculture was strong, with revenue was up 12% or 13% at constant currency, versus 11% and 8% last year. Profit growth is expected for the full year.

Grocery sales were up 1% or 4% at constant currencies and an improvement in margins is forecast for the full year.

Twinings and Ovaltine brands delivering good sales growth, strong trading for ACH in the US, stronger margins for George Weston Foods in Australia. Allied Bakeries losses should be reduced for the year, helped by volumes remaining strong, while the Acetum balsamic vinegar business acquired last year delivered sales in line with expectations.

Ingredients sales fell 1% at reported rates but up 4% at constant rates, with good sales and margin progress expected this year.

Group financing costs were guided lower, driven by lower costs in Zambia and higher income in the US and Canada, with the effective tax rate seen around 100 basis points lower than expected driven by Donald Trump's tax changes.

ABF shares lost 2.5% to 2,786p by 1020 GMT on Thursday, putting them roughly back where they were at the start of the year.

Broker Shore Capital said it did not foresee changes to the full year to September 2018, for which it was still forecasting profit before tax of £1.385bn and earnings per share of 134.1p, growth of 5.7% on 2017.

ShoreCap analyst Darren Shirley said Primark's sales growth was a little below expectations of 12% reported and 11% constant and and he expected the market to view this as disappointing, with growth from space increases indicating a modest decline in LFL sales across the entire estate, despite UK LFL growth he suggests was in the mid-single digit range.

He said stronger than expected commentary in grocery, agri, ingredients and below the line costs should broadly offset the not-that-surprising weakness in sugar.

"However, we expect attention to focus on the top-line miss from Primark, we choose to see this a blip in what has been very strong multi-year momentum with no apparel retailer immune from the vagaries of unseasonable weather however potential the format, and we do not believe Primark has any of its potency."

Henry Croft at Accendo Markets hailed Primark's continued market share growth as the "cheap clothing retailer of choice for UK consumers", with sales benefitting from consumers becoming increasingly cash conscious amid the continued squeeze on incomes from high inflation and weak wage growth.

"Meanwhile, the lack of online outlet complemented by the propensity for compulsive in-store purchases leaves the business in an unrivalled position on the high street; as others scramble to bolster their ecommerce presence, Primark remains an online non-conformist."

After a bumper Christmas, proving Primark can maintain sales to offset weakness elsewhere will be a key challenge when it publishes half-year results in late February, Croft added, noting the shares were holding above December's 2,777p lows but that bears may "eye a break below for a monster bearish flag back towards 2017 lows".