Associated British Foods has released a trading update in advance of its half year to 4 March 2017. The group did not adjust previous guidance, and still expects strong progress in adjusted operating profit and adjusted earnings per share. The shares dipped slightly on the news.
Primark is a monster, conquering all it comes up against. So far. Primark has opened six US stores to date, with further expansion planned this year. Success is critical; a Primark that trades well in the States will have vast growth potential, but if the brand fails to gain traction in the notoriously competitive US fashion sector, then a lot of hopes will have been dashed.
Across Europe, Primark has traded well, with the latest expansion into France appearing very successful. Shoppers in Northern Europe have been especially drawn to the brand, even the company seems a little surprised that opening new stores some distance away from existing ones led to cannibalisation of sales. Customers have clearly been travelling long distances to reach Primark, with stores effectively over-trading their location. As problems go, that's one of the better ones to have.
The squeeze from lower sterling is less of a welcome issue. A Primark customer is by definition price sensitive, which makes raising prices difficult. It looks like ABF will be taking a hit on margins here.
Elsewhere in the sprawling conglomerate that makes up ABF, sugar looks to be making a bit of a comeback. Global prices are recovering and increased production should help the division provide a sweetener to group profits. However, ABF's other divisions are small and unlikely to move the dial too much. Sugar aside, which is a cyclical business in any case, Primark remains the focus for now.
Trading update prior to half year results:
After stripping out the effect of currency movements, sales in Retail, ABF's largest division, are expected to be around 11% up on last year. Like-for-like sales in the UK are set to be around 2% higher, but are set to come in around flat at the group level, meaning the group's growth can be attributed to the continued store roll-out. A further 800,000 sq.ft. of sales space opened across 16 new stores in the period.
In Grocery, the group is expecting to improve margins further, with Twinings and Ovaltine both delivering good performances. During the period, the group completed the sale of its herbs and spices business in North America for $367m.
ABF's Agriculture and Sugar divisions are in line to benefit from higher commodity prices, with the Sugar division is expected to deliver a substantial increase in profit. Ingredients is also expected to see revenues ahead of last year.
Looking forwards, the group expects to achieve a stronger cash flow, driven by higher profits and an improved working capital position. While analyst consensus is for earnings to increase by around 13% this year, ABF says that this will be attributable to gains in the first half. The second half will see margins decline as the extra costs associated with the weaker pound kick in.
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