Primark owner Associated British Foods' (ABF) share price edged downwards this morning after it warned its boost from the devaluation of sterling will fade later in this year.
In its trading update, ABF said it expects Primark sales to be 11 per cent higher, when measured at constant currency, but that this growth would be "driven by increased retail selling space". Like-for-like sales in the UK were two per cent higher than last year. As a group, like-for like sales were flat.
ABF's revenues from its sugar arm will be "well ahead" of last year, the company said, with profits set to be boosted by higher sugar prices.
Full year earnings are expected to come in 13 per cent ahead of the year before, but most of the company's profit boost will be arriving in the first half as the positive effect of the weak pound will drop off throughout the year. ABF said it was expecting a £50m boost from the translation of overseas results in the first half.
In addition, the effect of the devaluation of the pound will push down margins when Primark's currency hedges run out in the second half (the UK represents half of Primark's business).
ABF's share price was down 0.77 per cent at the time of writing.
Why it's interesting
ABF generates revenues overseas in Asia, Europe and the Americas, meaning the company has been benefiting from weak sterling.
For all UK retailers, the cost of goods will surge this year when their currency hedging arrangements run out. Different retailers will have different policies in place, but they will all have to devise ways of combating this new cost pressure, on top of labour cost inflation coming from the national living wage.
What Associated British Foods said
The company said it expects to make "excellent" progress in operating profit and adjusted earnings per share and that it hasn't changed its outlook for trading throughout the year.
What analysts said
George Salmon, equity analyst at Hargreaves Lansdown, said:
Sterling's fall has given ABF a shot in the arm.
However, organic growth is stalling, and the group is now dependent on new sales space for much of its growth, while margins will also take a hit as the pound’s fall feeds through to higher input costs. In light of these challenges, there is increased pressure on the group to deliver seamless execution of its plans.