8th Nov 2016 08:55
LONDON (Alliance News) - Associated British Foods PLC on Tuesday said it continues to expect profit growth in its current financial year despite a margin squeeze facing its Primark discount fashion store chain, as cost cutting and one-offs not repeating drove profit higher in the recently ended financial year.
Shares were up 7.0% to 2,663.00 pence Tuesday, the best performer in the FTSE 100 by some distance.
AB Foods - which in addition to Primark owns British Sugar, agricultural, consumer foods and ingredients businesses - said it made a pretax profit of GBP1.04 billion in the 53 weeks to September 17, up 47% from the GBP707.0 million it made in the comparable period a year before.
Profit was boosted by cost cuts made in the Sugar and Ingredients businesses and by lower exceptional items booked by the group on disposals it made a year before. These included writedowns on the group's stake in Vivergo Fuels, a biofuel supplier, and a loss on the sale of two sugar factories in China.
Adjusted operating profit, stripping out one-off items, was GBP1.12 billion, up 3.0% year-on-year.
The cost reductions made in the Ingredients arm, focused on yeast and bakery products, drove a 22% rise in adjusted operating profit for the Ingredients business in the financial year, AB Foods said, while further margin improvements were achieved in the Grocery and Agriculture units despite challenges facing revenue growth driven by commodity price inflation.
Revenue increased to GBP13.40 billion from GBP12.80 billion the year before, driven by 11% revenue growth at Primark, as it continued to open new stores and translation of international sales benefited from the weak pound after the Brexit vote. Sales also rose in the Sugar, Ingredients and Grocery businesses, offset partially by lower sales in the Agriculture division.
The key focus for investors going into the results was the operating margin at Primark, which was 11.6% in the financial year, down from 12.6% the year before, primarily due to the weakness of the euro against the dollar. AB Foods reiterated its warning that as Primark buys the majority of its merchandise in dollars, the weak pound, which boosted revenue in its 2016 financial year, will squeeze UK margins further in the new 2017 financial year.
Over the course of the past financial year, AB Foods increased Primark's selling space by 1.2 million square foot, with a presence in eight countries. "Extensive" new openings are expected in the coming year too, AB Foods said.
Like-for-like sales at Primark were down 2.0% year-on-year, however, in line with AB Foods' previous guidance. The group said the retailer was hit by warmer-than-normal weather in the run-up to Christmas 2015 and by a "very cold" March and April - meaning fewer sales of Christmas jumpers and also of light spring clothing.
Total sales for Primark rose 11%, thanks to the weakness of the pound and the increased selling space, or 9.0% in constant currencies.
AB Foods said it still expects to make higher adjusted operating profit in the coming year, driven by Primark's ongoing expansion, AB Sugar benefiting from an increase in sugar prices and a reduction in costs, and further progress in the group's other divisions.
The company declared a final dividend of 26.45 pence per share, taking its total dividend up 5.0% year-on-year to 36.75p.
"This has been a year of progress for all of our businesses with a substantial expansion in Primark's selling space, increased margins in all of the food businesses and fundamental structural changes at AB Sugar. The recent decline in the value of sterling presents both benefits and challenges to the group," said AB Foods Chief Executive George Weston.
"The diversity of our operations and our broad geographical footprint, combined with a strong balance sheet, equip us well to take advantage of these opportunities as they arise," he added.
By Sam Unsted; [email protected]; @SamUAtAlliance
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