Primark owner Associated British Foods ‘dodging most economic bullets’ as outlook improves

Primark owner Associated British Foods has upped its outlook for the full year after reporting a jump in sales at the budget fashion chain as consumer spending held up better than expected.

The group said sales at the retailer, which has 419 stores, are set to rise by 16 per cent at actual exchange rates to £4.2 billion in the first half to March 4, up 10 per cent on a like-for-like basis – and ahead by 14 per cent in the UK.

AB Foods said while it continues to see “significant” cost pressures, consumer spending has “proven to be more resilient in this trading period than anticipated at the start of the financial year”.

The firm now expects group-wide half-year operating profits to be flat and for annual group-wide underlying earnings to be broadly in line with the previous year, against prior guidance for lower earnings.

It comes as its food business and ingredients arm are also set to see a higher half-year result, but one analyst said the Primark owner is “currently dodging most of the economic bullets being fired in its direction.”

AB Foods, which also owns Ryvita, Jordans and Twinings, cautioned over consumer spending in the second half as the cost-of-living crisis continues to put households under pressure.

It said Primark’s first-half performance was boosted as it came up against comparatives from a year earlier, when Omicron weighed on trading, and that like-for-like sales growth will slow in the final six months.

AB Foods said: “Trading at Primark has been good in all its markets, well ahead of expectations, and represents a material improvement in both the UK and Europe on the second half of our last financial year.”

It added: “Looking ahead to the second half, we remain cautious about the resilience of consumer discretionary spending in the face of continuing inflation in the cost of living and higher interest rates.

“Our expectation is that like-for-like sales growth in the second half will be lower than that achieved in the first half but, based on our experience to date, will be better than our previous expectation.”

It said sea freight costs have returned to more normal levels and energy costs are much lower, but that goods are still seeing steep inflation due to the strength of the US dollar against sterling and the euro, while higher wage costs are expected.

The group added that it is rolling out the launch of its Primark website – already up and running in the UK and Ireland – to Germany, Spain, France and the US soon, with other markets by the summer.

Elsewhere in the group, AB Foods said its food business has been able to offset surging inflation through keeping a tight rein on costs and price hikes, and is set to see underlying earnings “well ahead” in the first half, and for operating profits at its ingredients arm to be “significantly” higher year on year .

Underlying earnings at its grocery business is expected to be slightly lower than last year, with inflation continuing to run ahead of pricing and cost-saving efforts, it added.

The sugar business has been impacted by a much lower UK beet crop and higher costs as a result, which will see its earnings remain flat.

Reflecting on the results Richard Hunter, head of markets at interactive investor, said “the return of the consumer to physical shopping and the brand’s value offering are a complementary and compelling combination. While the group is understandably cautious on the immediate outlook for discretionary spending given the tough economic backdrop, for the moment the consumer is showing signs of resilience which defy the retail naysayers.

The journey is not all plain sailing, of course, and the strength of the US dollar has had a particular impact on costs, such as freight rates and buying goods from Asia, while elsewhere labour and energy costs continue to outweigh any price increases which the group has been able to pass on to the consumer.

“The website also remains a work in progress, with the Click and Collect service still in its nascent stages and with the overall offering leaving the Primark business largely reliant on physical sales.

“In all, the idiosyncratic nature of the group continues to play into the hands of AB Foods.

“The shares have certainly enjoyed a strong run of late, having risen by 23 per cent over the last three months, which has helped dampen the disappointment of a previous profit warning and leaves the shares ahead by 3 per cent over the last year, as compared to a hike of 5% for the wider FTSE100.

“The market consensus of the shares as a hold reflects uncertainty over the immediate outlook, but for its part AB Foods is currently dodging most of the economic bullets being fired in its direction.”

Press Association – Holly Williams