- Conglomerate raises full year guidance
- Budget fashion arm Primark continues to take market share
- Cost pressures facing group remain ‘significant’
Shares in Associated British Foods (ABF) firmed 2.5% to a one-year high of £19.96 after the global foods-to-fashion conglomerate posted a positive first-half trading update and upgraded full-year earnings guidance.
The improved outlook followed a half in which the FTSE 100 constituent’s discount fashion arm Primark impressed on the back of ‘more resilient’ than feared consumer spending and achieved higher-than-expected margins.
There was also relief as Associated British Foods said inflation had become less volatile, with some commodity costs in decline.
SURPRISE GUIDANCE UPGRADE
For the year to September 2023, Associated British Foods now expects adjusted operating profit and adjusted earnings per share to be ‘broadly in line with the previous financial year’, fresh guidance which represents an 11% upgrade to broker Shore Capital’s earlier earnings expectations.
Budget apparel purveyor Primark traded ‘very well’ in the half and its total sales are expected to be up 19% year-on-year at £4.2 billion.
PRIMARK LIKE-FOR-LIKES TO SLOW
Trading at Primark has been ‘good in all its markets’ and ‘well ahead of expectations’, insisted Associated British Foods, with UK trading proving ‘particularly strong’ and the retailer seeing a ‘very positive’ early reaction to its spring and summer ranges.
The company expects Primark’s first half like-for-like sales to be 10% ahead thanks to higher volumes and higher average selling prices with a better-than-expected adjusted operating profit margin of above 8%.
However, looking ahead to the second half, Associated British Foods remains ‘cautious’ about the resilience of consumer discretionary spending in the face of the cost-of-living squeeze and higher interest rates, and expects like-for-like sales growth to slow in the second half as a result.
INFLATION REMAINS A CHALLENGE
Elsewhere within the diversified group, sales and profit from the food businesses were ahead of expectations in the half, though margins came under pressure.
Associated British Foods is seeking to recover inflation through cost-cutting and price increases and expects full-year operating profit in foods to be ‘modestly ahead’ of last year.
Annual ingredients profit is expected to be ‘well ahead’ of last year, but increased costs caused by the much lower UK beet crop will reduce second-half profits at AB Sugar. And operating profit in the grocery arm is expected to be broadly flat year-on-year as ‘the benefit of our pricing actions become more apparent’.
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould said Associated British Foods ‘painted a positive picture’ with its latest update, with good news on both demand and costs helping the company to raise guidance.
‘Resilient spending at Primark could well reflect the company’s budget credentials, people trading down from more expensive chains and brands,’ said Mould.
‘Particularly in areas like kids’ clothes where growth spurts mean clothes have a relatively short shelf life and therefore price rather than quality is a big driver of purchases.
‘Longer-term there is a challenge for Primark to address concerns about disposability, particularly as shoppers become more environmentally conscious. The company has at least been making some progress on this front with its clothes containing a greater proportion of recycled materials and cotton farmers in its supply chain in Asia taught regenerative farming techniques.’
Mould added that the reference to less volatile inflation is significant. ‘It suggests well-run companies, of which Associated British Foods is one, can manage rising prices so long as they are reasonably stable and allow them to plan with some visibility.
‘The company is managing to raise prices in its food business and is also successfully trimming costs to help protect its profitability.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Ian Conway) own shares in AJ Bell.
