AB Foods overcomes rare Primark dip with 'encouraging' revival

In a pre-close trading update ahead of its 3 March half-year results, the FTSE 100 group said adjusted operating profits were looking to be "in line" with the £652m produced a year ago, with earnings per share improving on that period thanks to lower net financial costs and a lower effective tax rate.

Total sales at Primark, the company's barnstorming growth engine of recent years, were up 9% in the first half or 7% at constant FX, driven by seven store openings to a total of 352 and an increase in retail selling space of 0.4m square feet to to 14.3m sq ft, with over 15m expected by year-end. When excluding store expansion the fast-fashion chain's like-for-like sales were down 1%.

This considerable slowdown from the growth seen in the past full year, where total sales were up 19% and LFLs 1%, was partly blamed on unseasonably warm weather in October. Management were encouraged that LFLs for the last 16 weeks of the period were in positive territory, with Primark achieving "record sales" in the week before Christmas and early trading of the new spring/summer range has also been "encouraging".

In the UK, Primark lifted sales 8% and LFLs 4% to increase its market share of the total clothing retail subsector, while the US continues to make progress.

Primark's operating profit margins in the first half are expected to be close to those in the same period last year with better product buying close to offsetting the adverse effect of the US dollar exchange rate on purchases, tight management of stock and markdowns in line with the first half last year.

Looking at the other parts of the conglomerate, AB Sugar's revenue and profit is expected to be down on last year, as forewarned due to significantly lower EU sugar prices, which will be partially offset by a much larger UK crop and performance improvements.

Grocery revenue and profits are expected to be ahead of the first half last year at constant currency, with margin benefits driven by Twinings Ovaltine.

Agriculture revenues will be stronger due to increased UK commodity prices but profit will be flat as grain trading was held back by lower volatility in prices.

The ingredients business is expected to see better revenues at constant currency, with profits margins continuing to improve.

Cash flow will be negative in the first half at the underlying level before acquisitions and disposals, as in past years, and capital expenditure at the same level as last year, with full year cash flow in line with expectations. After the £284m acquisition of Acetum, the net cash balance is expected to be £100m at the half year.

ABF shares, having fallen more than 20% since October to a 10-month low earlier this month, were up almost 2% to 2,694p.

Analysts at RBC Capital Markets said the statement overall was broadly in line with their expectations, with grocery a bit better and cashflow a bit worse than expected.

While operating margin guidance was unchanged, RBC saw potential for a stronger margin performance for Primark next year owing to a weaker USD trend versus the EUR and the GBP.

"For Primark, we expect strong dollar sourcing gains next year. Primark is probably the biggest beneficiary of this given its low gross margin, and it should start to see the benefit earlier than other UK retailers. However, we also expect LFL sales to remain pedestrian owing to tough comps in the UK, issues internationally and the lack of a transactional online offer."

With the outlook unchanged and progress expected in both adjusted operating profit and adjusted EPS, Shore Capital's analysts left their forecast unchanged for EPS up 6.1% to 134.6p and were encouraged by the positive growth for Primark in the latter 13 week period.

"Overall no surprises in today’s update, and some early stage evidence in improvement in Primark’s LFL growth after a weather impacted Autumn/Winter season from which we take encouragement."