ABF's revenues rose 16% to £6.7bn during the 16 weeks ended 7 January, ignoring the effects of exchange rates. This reflected growth in all business segments, including 15% growth in Retail sales and 17% growth in total Food sales.
On a like-for-like basis, Primark sales were 11% ahead of the same period last year, following a "very strong" Christmas period. The group said higher unit volumes, sales prices and a more normal rate of supported this growth. As expected, underlying operating margins were lower than last year due to inflation in the cost of bought-in goods.
In the Sugar segment, UK full-year production expectations have been lowered from previous forecasts of 0.9m tonnes to 0.74m tonnes. This reflects lower beet sugar yields following recent adverse weather conditions. As such, profitability at British sugar is now expected to be lower than previously expected.
Looking forward, ABF still expects significant growth in full-year sales, but sees its underlying operating profits and earnings per share coming in lower than last year thanks to significant cost pressures.
The shares were unmoved following the announcement.
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Our view
Associated British Foods' latest trading update was a mixed bag. Sales across all business segments rose sharply, but there are challenges to consider - things may get worse before they get better.
Primark is a crucial part of the business, and we're wary of the division's significant cost inflation of late. While increased sales prices have helped to combat this, price rises risk alienating the value-chain's core customer base, putting a lid on how far these increases can go. Sensibly, the fashion powerhouse has made the decision to cap these hikes, but that's resulted in margins and profitability coming under pressure. The group's hinging hopes on increasing volume sold instead.
As a lower-priced option, Primark is well positioned to deal with consumers' shrinking budgets. But at the same time, should the economic situation become protracted, Primark's fast fashion could find itself left unsold. If we see a situation where volumes struggle and prices are kept stagnant, it will further dent margins.
Primark has also been making improvements to its online offering. The website has been given an overhaul, but stops short of full scale deliveries and is instead more of a viewing platform. A click and collect trial in the UK has been described as encouraging but stops short of giving any tangible data. While good for the consumer experience, we have concerns. The lack of large-scale delivery infrastructure is a key driver in being able to keep its prices so low.
However, just as Primark is feeling the sting from inflation, price hikes in other parts of the business have started to filter through, with high sugar prices in particular softening the blow. ABF is home to an eclectic mix of other food and commodity businesses. This diversification helps to mitigate risk and ensures that the company isn't overly reliant on any one particular product.
The group has a debt pile of £1.8bn. This isn't alarming when compared to cash profit (EBITDA) levels, but is higher than we'd like. The burden stems from adverse delivery timings of Primark stock because of supply chain issues.
ABF is a well-managed ship in the middle of a storm. We believe that storm will pass, but its length and potency is hard to predict. The group offers a dynamic business model and growth opportunities at Primark, especially in the US. In the short-term, jittery customers and inflationary pressures are likely to keep a lid on profits. But longer term, with inflation easing and commodity costs normalising, we think there's plenty of room for ABF to restore margins.
ABF key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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