- Conglomerate launches £500 million buyback
- Primark vows to hold prices to help cash-strapped fashionistas
- Operating profit expected to decline this year
Shares in Associated British Foods (ABF) rallied 5% to £15 to top the blue chip benchmark after the Primark parent’s results for the year ended 17 September 2022 came in slightly ahead of consensus expectations following a surge in profits at its budget clothing chain.
There was also relief as the foods-to-fashion conglomerate reiterated full year 2023 guidance and launched a bumper £500 million share buyback, one signalling management’s belief that shares in the diversified business are undervalued.
While Associated British Foods still expects to generate significant sales growth in the new financial year, with economic conditions ‘challenging’ and the consumer discretionary spending outlook weakening the company is sticking with its guidance for year-on-year declines in both adjusted operating profit and adjusted earnings per share.
Associated British Foods said it will not be implementing further price hikes at Primark for the upcoming year as the group reported a near-50% jump in adjusted pre-tax profits to almost £1.36 billion on sales up 22% to £17 billion, although a £206 million write-down on its Primark business in Germany took some of the gloss off strong earnings.
Primark sales were up 40% year-on-year to £7.7 billion as footfall at stores returned to pre-Covid levels, while food sales fattened up 10% as the group raised prices to help recover higher input costs.
Adjusted operating profit for the sugar, agriculture and ingredients businesses was ahead of last year.
WHY PRIMARK WON’T BE RAISING PRICES
Chief executive George Weston said Primark’s sales and profits increased significantly as more normal customer behaviour resumed after the pandemic. ‘Significant progress was made in building out Primark’s digital capability,’ he explained, ‘which will be a key element in the future development of Primark.’
Looking ahead, Weston warned ‘substantial and volatile input cost inflation’ will be his charge’s most significant challenge in the new financial year, and ‘our businesses will continue to seek to recover these higher costs in the most appropriate way.’
Despite facing inflationary pressures, Associated British Foods vowed to hold Primark prices for the new financial year at the levels already implemented and planned and ‘to stand by our customers, rather than set pricing against these highly volatile input costs and exchange rates’.
BUMPER £500 MILLION BUYBACK
Cash-generative Associated British Foods demonstrated confidence in its future prospects by declaring an 8% increase in the total dividend to 43.7p and announcing a £500 million, earnings-enhancing share buyback.
Like most retailers, shares in Associated British Foods have been decimated this year as the market prices in a recession, but management clearly believes the stock is now oversold.
Based on the closing price on 7 November, the buyback represents around 4.7% of Associated British Foods’ issued share capital and the company plans to complete the operation within the new financial year.
‘The board views the share buyback as an investment, rather than simply a return of capital, with both the size and timing of the programme now considered to be appropriate for the delivery of value to shareholders whilst at the same time, continuing to leave appropriate scope for both organic and inorganic investment opportunities’, explained the group.
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould said Associated British Foods is ‘fighting back from Covid with a vengeance, with its Primark chain seeing a big jump in sales as the world returns to a more normal state post-pandemic’.
He added that the decision to now hold prices in Primark and sacrifice some margin as inflation remains high ‘shows that it cares more about its customers than profits. It’s a calculated move which Primark hopes will earn it some with goodwill with customers as the company which understood the financial pressures people are under.
‘Primark’s business model is based on shifting a large volume of goods at low prices. It relies on people browsing the aisles and popping items in a basket on impulse because they look cheap. There comes a level when a higher price will stop this shopping behaviour and Primark clearly doesn’t want to reach this tipping point. It seems to be taking the view that it’s better to have customers buy something at a lower margin than nothing at all.’
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.
