Primark will not do enough to offset the fall in sugar prices and currency headwinds for parent company Associated British Foods, which is expecting a "marginal decline" in adjusted earnings per share for the year.
Total revenues at ABF grew three per cent for the 16 weeks to 3 January, with Primark providing the bulk of growth, with sales rising 15 per cent on a constant-currency basis thanks to strong Christmas trading.
However, like-for-likes were affected by warm weather as well as new store openings in Germany and the Netherlands. As a result of weaker euro Primark sales were up 12 per cent on the same period last year, while operating profit margin was down on last year, though this was in line with expectations.
Sugar is presenting the real challenge for ABF however, with lower prices squeezing margins. Lower sugar prices have been squeezing margins, with ABF noting there is "continuing poor market prices". Sugar production is expected to rise to 1.4m tonnes compared to 1.32m tonnes last year, although ABF is shutting its factories in Heilongjiang, China. Interim results will include a £128m write-down and a one-off £18m charge for associated costs.
Why it's interesting
Analysts have been relatively bullish ABF, with JP Morgan reiterating its overweight stance. Credit Suisse and Citigroup were also optimistic about the company's prospects. Primark has been the source of much of ABF's positive comment. In November, ABF said it "Primark's trading success and significant expansion delivered another magnificent year".
Primark's performance gives good reason for an upbeat assessment of ABF, although as with other clothing businesses as wide-ranging as Asos and Burberry, the strengthening pound presents a challenge.
AB Sugar. however, is dragging the overall business down.
With the fall in EU sugar prices and weakness in the world sugar price, we expect a further large reduction in profit from AB Sugar.
What the company said
Commenting on the company's outlook Primark said in its trading statement:
This year we expect Primark's expansion to continue and Grocery, Ingredients and Agriculture to make further progress in operating profit on the back of their very positive performance last year.
We expect a decline in adjusted operating profit for the group but the impact on earnings will be mitigated by much lower tax and interest charges.
Sterling’s strength against most of our major trading currencies will also have a negative effect and we now expect a marginal decline in adjusted earnings per share for the group for the full year.
Primark remains a bright spot for ABF with strong sales continuing. However, the substantial fall in sugar prices across the EU is going to have a big impact on the profits of AB Sugar.