- Primark warns of margin pinch
- Discount fashion chain to limit further price increases
- Click & Collect trial launch on track
Shares in Associated British Foods (ABF) plunged 7.3% to a five-year low of £13.49 after the foods-to-fashion conglomerate warned profits will fall in the new financial year as surging energy costs, unfavourable currency swings and the cost-of-living crisis pressure margins at its Primark clothing arm.
In theory the discount fashion chain should benefit as shoppers trade down from more expensive retailers, but a good chunk of its core customer demographic sits in the lower-income category and these individuals are really feeling the pinch.
Associated British Foods is still guiding towards increases in group level adjusted operating profit and earnings per share (EPS) for the year to 17 September 2022, on revenue ‘well ahead’ of the previous year’s £13.9 billion.
This reflects a mix of price and volume increases in its food business and Primark benefiting from the lifting of Covid restrictions and the resumption of more normal customer behaviour.
PRIMARK FEELS THE PINCH
Disappointingly, Associated British Foods warned adjusted operating profit and EPS are set to fall in the next financial year, with Primark’s operating margin now expected to be lower than the second half of the year drawing to a close.
The cut-price fashion retailer is having to absorb rising costs caused by surging energy prices and a strengthening US dollar and margins will also be impacted by the value retailer’s decision to limit further price increases next year with inflation eating into cash-strapped consumers’ disposable income.
40% SALES SURGE
The margin warning overshadowed the news Primark’s total sales for the year just ended are expected to be some £7.7 billion, up 40% year-on-year following the end of Covid-related restrictions and the resumption of more normal customer behaviour.
Fourth quarter like-for-like sales were flat on the third quarter, as continued improvement in the UK market was offset by a weaker than expected showing in Continental Europe.
Primark’s total sales in the US in the fourth quarter were 27% ahead of pre-Covid levels with a boost from new store openings.
Associated British Foods also revealed that Primark’s new UK website, live since April, has seen traffic and engagement steadily build from a strong start.
‘We remain on track to launch the UK trial of a Click & Collect service in the run-up to Christmas this year, focused on 25 stores in the north of England and Wales,’ said Primark’s parent company.
‘We have chosen a much-expanded range of children’s products for this trial, which we believe has the potential to satisfy unfulfilled demand, driving footfall from both existing and new customers to deliver incremental sales in store.’
THE EXPERT’S TAKE
Russ Mould, investment director at AJ Bell, said Associated British Foods ‘will be hoping that Liz Truss can pull a rabbit out of the hat when she unveils her plan to deal with the energy crisis, praying that help is given to businesses as well as consumers.
‘Primark has a lot of lights to keep on as it is one of the few retailers to still prioritise physical shopping outlets, rather than online. Pressure on energy costs means its margins will be squeezed, which is not a good situation for a low-ticket seller.
‘Primark’s business has thrived over the years as many customers who visited its shops intending to buy one item ended up walking away with a bundle of clothes, having been tempted by the low prices. Now we face a situation where many of its customers will have to think hard about every shopping decision, and the historical “load up the basket” mentality may no longer apply.
‘Ultimately Primark works as a volume business - prices are cheap, but it needs to sell a lot of items to earn big money. The risk now is that the average basket size falls and costs keep going up. The fact it buys most of its clothing stock in dollars adds to its problems, given that sterling is under considerable pressure.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
