26th Apr 2022 10:17
(Alliance News) - Primark's ability to maintain its status as a value retailer while also lifting prices was questioned on Tuesday.
FTSE 100-listed parent Associated British Foods PLC posted largely positive first-half numbers, though the report was marred by the warning of price hikes at high street chain Primark, as cost pressures heat up.
AB Foods shares were 5.5% lower at 1,540.28 pence each in London on Tuesday morning, the worst large cap performer.
"Primark has a fine balance to strike, as its bargain prices could help it gain market share if consumers trade down thanks to tighter household budgets. However, if it goes too far in lifting prices it could undermine its value proposition," AJ Bell analyst Russ Mould commented.
AB Foods also operates a Grocery, Agriculture, Ingredients and Sugar arm. Brands within those units include Billington's sugar, Kingsmill bakery and the Blue Dragon Asian food products brand.
But it is commentary on Primark which often steals the show, and Tuesday was no different.
AB Foods Chief Executive George Weston warned that Primark will need to raise prices to customers in order to offset rampant cost increases.
"Looking further ahead, inflationary pressures are such that we are unable to offset them all with cost savings, and so Primark will implement selective price increases across some of the autumn/winter stock. However, we are committed to ensuring our price leadership and everyday affordability," Weston said.
In the first half ended March 5, Primark's sales rose 59% year-on-year to GBP3.54 billion.
Mould added: "If your brand is all about value then protecting margins is tricky as Primark and its owner Associated British Foods have found.
"Attempts to cut costs to protect profitability haven't proved sufficient so Primark is now planning 'selective' price increases but notably these won't prove sufficient to prevent a greater reduction in margins than previously forecast in the second half of its financial year."
AB Foods said it expects a "greater margin reduction" in foods businesses than previously expected for the full year.
"We expect recovery in the run-rate of these margins but the full effect of margin recovery is now anticipated in our next financial year," the company added.
All the company's food units are "experiencing increasing inflationary pressures", AB Foods said.
AB Foods said group revenue in the financial first half ended March 5 rose 25% to GBP7.88 billion from GBP6.31 billion a year prior.
Pretax profit more than doubled to GBP635 million from GBP275 million. Operating profit jumped to GBP686 million from GBP320 million.
The company also more than doubled its interim payout to 13.8 pence from 6.2p.
CEO Weston added: "Notwithstanding the inflationary pressures we are experiencing, our outlook for the year is for significant progress in adjusted operating profit and adjusted earnings per share for the group."
Broker Liberum reiterated its 'buy' rating for AB Foods, taking heart from Primark's offering, even as price increases loom.
Primark, currently without an online sales presence, has a hefty social media following, something investors have overlooked, according to Liberum.
"We believe the Primark proposition remains relevant and resonates even with today's digitally native consumers, a fact that remains underappreciated by investors," Liberum explained.
As of Tuesday morning, Primark has 9.5 million followers on social media platform Instagram, slightly below boohoo Group PLC's 11.2 million and Asos PLC's 13 million.
By Eric Cunha; [email protected]
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