AB Foods profits stumble as surging Primark growth constrained by currencies

21st Apr 2015 07:08

Profits at Associated British Foods fell in the first half as the surging performance of its Primark fast-fashion chain was outweighed by a weaker sugar business.The group also adjusted its outlook for adjusted full year earnings, warning that currency headwinds were now expected to lead to a "modest decline", having previously signalled a "marginal decline".This led to immediate downgrades from City analysts, with Credit Suisse for example seeing a likely "much greater impact" in the new year and lowering 2015/2016 estimates a further 6%, to some 15% below the previous consensus.In the 24 weeks ended 28 February, group revenue growth was held back by sterling strength to just 1% to £6.25bn, rising 3% on constant currencies, while adjusted operating profits were down 5% to £474m, or a just 2% if forex is ignored.Sterling was stronger against most of the group's major operating currencies in the first half, particularly the euro.The exception is the surging dollar, which causes ABF particular pain, as it does most of its buying in this currency and most of its selling in pounds and euros. Credit Suisse said Adjusted earnings per share rose 1% to 46.1p and the dividend was lifted 3% to 10.0p.The Primark high street clothing chain grew sales 12% to £2.5bn, 15% at constant currencies, with operating profit up 8% to £322m, or 11% if ignoring FX.This was driven by an 11% increase in retail selling space and exceptionally high sales in the 10 stores opened during the last 12 months.It was not a clean report card for Primark, with like-for-like sales staying level with last year due to unseasonable northern European weather and the impact of store openings in the Netherlands and Germany on existing shops nearby.Management said Primark's much-anticipated plans for entry into the north-east USA were "well advanced". A launch in seven stores is due in the autumn, with further management hires made during the period.The food businesses were dominated by the continuing decline of the sugar arm as EU sugar prices dwindled substantially, dragging previous profits into a marginal operating loss, though some recent stabilisation in EU sugar prices was highlighted.Sugar is expected to benefit in the second half of the year from performance improvement initiatives and the non-recurrence of costs from last year's restructuring.The recovery at the ingredients segment continued with a robust increase in profit, agriculture maintained its recent trend of operating profit growth, and grocery continued its own trend of margin improvement in what remains a difficult trading environment.Credit Suisse analysts noted that the company's warning that the transactional impact will be much greater than the translational impact "will only hit the current financial year for the last month or so (yet is enough to lower the guidance), so the far greater impact is in the new year".These impacts will be "keenly felt in Primark" as it has dollar costs and mostly euro and sterling revenues, and sugar as it has sterling costs and euro revenues, and as group expressed its continued focus on "offering the lowest price and best value" on the high street, analysts noted this offered little prospect of significant pricing to offset the currency effects.In the long term CS said the Primark story "remains good" but the margin outlook "may trouble the share price short term".