8th Sep 2022 11:31
(Alliance News) - Associated British Foods PLC's unexpected trading statement on Thursday left investors feeling disconcerted, as shares sunk with the firm's Primark retail chain facing heightened cost pressures.
Shares in FTSE 100-listed AB Foods were down 9.4% at 1,318.05 pence each on Thursday mid-morning. They are down 35% so far in 2022.
"Plenty of companies around the world have bemoaned inflationary pressures thanks to the rising cost of labour, raw materials and energy. The latter is now taking an even bigger bite out of company profits and causing further pain," AJ Bell Investment Director Russ Mould said.
"Primark-owner Associated British Foods is the latest to warn on profits because of higher energy bills, as well as unfavourable foreign exchange rates. It 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."
The new UK prime minister is reportedly set to unveil a plan to guard Britons against crippling costs while boosting the country's energy security. Truss is expected to tell members of Parliament on Thursday that domestic energy bills will be frozen at around GBP2,500 as part of a package to ease the cost-of-living crunch – said to cost up to GBP150 billion.
AB Foods warned of lower profits to come, as Primark expects a squeeze in margins owing to a hike in costs.
Mould added: "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."
Looking ahead to the new financial year, AB Foods expects adjusted operating profit to be lower compared to the current financial year.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said Primark has previously batted away inflationary headwinds "pretty adeptly", but now "margins and profits will take a hit as it plans to absorb higher input prices rather than pass them onto customers.
She added: "It clearly doesn't want to put its value tag at risk when the fight for shoppers is set to intensify in the months to come. Volumes were already at risk for clothing retailers given that the latest retail snapshot showed that people were cutting back on non-essential items. Knitwear sales though had surged according to the British Retail Consortium, and Primark could end up benefiting from the trend to stock up on cheap woollies to cope with a bleak winter season as thermometers are turn down to save on bills."
In better news for the group, AB Foods expects to report a strong performance for its current financial year through a mix of price and volume increases in its Food business and Primark benefiting from the lifting of Covid restrictions.
AB Foods said its expectations for the 52 weeks ending September 17 remain unchanged, with revenue expected to be "well ahead" of the GBP13.88 billion reported for the year before.
Victoria Scholar, head of Investment at interactive investor, said: "Its food division is performing well with sugar operating profit ahead so far this year, while grocery operating profit is expected to meet expectations."
Within the Food business, Sugar, Grocery and Agriculture all saw a rise in revenue due to higher market prices for many products.
Total Primark sales for the year are expected to come to GBP7.7 billion on a constant currency basis, a 40% rise from the prior year.
Adjusted operating profit for the period is also expected to be significantly ahead of the GBP1.01 billion reported the year before, helped by lower interest rates and therefore lease interest expenses.
The firm noted Primark has been dealing with supply chain issues, rising energy costs and inflation in raw materials costs, not to mention higher purchasing costs due to a strengthening US dollar.
To battle this, the store "plans to improve store labour efficiency and deliver lower operating costs".
ii's Scholar said Primark is "an extremely price sensitive business" and will struggle to pass on any price increases to customers without hitting sales.
AJ Bell's Mould added: "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."
By Paul McGowan; [email protected]
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