5th Sep 2024 14:17
(Alliance News) - Associated British Foods PLC on Thursday saw its shares slip, after warning that falling European sugar prices are likely to hit the division's performance in the coming financial year.
The London-based food processing and retail operator also bemoaned the impact of bad weather, as it reported a drop in like-for-like sales in the fourth quarter for its discount retailer, Primark.
"Primark has had a good run but it is not immune to the vagaries of the British weather and owner Associated British Food's year-end trading update reveals the retail chain has been hit by the soggy summer," explained AJ Bell analyst Russ Mould.
Revenue growth at Primark, is expected to be around 4% in the second half, driven by a strong sales contribution from the continued store expansion programme. But LFL sales are expected to fall by around 0.5%, with growth of 0.2% in the third quarter offset by a likely decline of around 0.9% in the fourth quarter.
"Blaming poor performance on the weather may not be the greatest look but it is understandable that it will have had an impact on Primark given its reliance on footfall to generate sales in the absence of an online offering, beyond click and collect," Mould added.
The bad weather resulted in lower footfall and particularly impacted sales of seasonal lines in womenswear and footwear, AB Foods explained. But while volumes were soft, the average selling price increased as a result of mix.
And, as Mould noted, Primark's operation "is at least benefiting from lower costs in some areas which are helping to increase margins".
Margin delivery was strong in the second half and the firm now expects adjusted operating profit margin for the full year to be a little over 11.5%. The "significant" margin recovery compared to a year ago reflects an increase in product gross margin, largely due to lower material costs, reduced realised freight costs and foreign exchange improvement, the firm said.
For financial 2025, AB Foods expects Primark to deliver "good" sales growth with an adjusted operating margin broadly in line with this year's level.
Significantly less sweet were the prospects for AB Food's sugar unit, as European sugar pricing looks set to hit the division hard.
The division is forecast to deliver adjusted operating profit of around GBP200 million in the financial year ending September 14, which is still strongly ahead of last year, the firm added. In financial 2023, the sugar unit contributed an adjusted operating profit of GBP169 million, a slight increase from GBP162 million in 2022.
But the reduction in pricing seen in the fourth quarter is likely to "significantly" impact performance in its European sugar business next year, with operating profit now expected to be in the range of GBP50 million to GBP75 million in financial 2025.
Profitability is then expected to recover in financial 2026, and be more in line with financial 2024.
Elsewhere, not all was lost, as both the ingredients and grocery units helped to pick up "some of the slack".
Grocery has continued to perform well and AB Foods expects sales growth to be around 3% in the second half, reflecting good demand for international and regionally‐focused brands.
Profitability in Ingredients remained "strong" in the second half, in line with previous expectations, the firm added.
Sales continued to grow well in the division with the yeast and bakery ingredients business, AB Mauri, performing strongly.
In Agriculture, AB Foods expects profitability for financial 2024 to be "broadly in line" with last year.
Chief Executive George Weston said: "Notwithstanding this short‐term volatility in Sugar, we are optimistic about the outlook for the rest of the group, which is well positioned for further strategic progress supported by continued reinvestment for the longer term."
AJ Bell's Russ Mould affirmed as much, adding that the "overall messaging for the next financial year looks positive".
News that AJ Bell will extend its share buyback programme by an additional GBP100 million has also helped to "signal some confidence in its prospects", added Mould.
The buyback is expected to conclude by November 5, when the firm will release annual results.
Shares in Associated British Foods were down 6.4% at 2,341.00 pence each in London on Thursday afternoon.
By Holly Beveridge, Alliance News senior reporter
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