By Kristy Dorsey
Sugar, grocery and retail conglomerate Associated British Foods (ABF) has raised its full-year profit forecast despite sliding sales at its Primark clothing chain.
In its pre-close trading update for the 53 weeks to September 18, ABF said like-for-like sales at Primark during the fourth quarter are expected to come in 17 per cent lower than levels seen before the pandemic. That was after a 3% increase in the third quarter when stores began re-opening from lockdown.
Following the initial “enthusiasm” among shoppers from the release of pent-up demand, sales began to slow again from late June along with the rise in the number of people required to self-isolate following contact tracing alerts. The “pingdemic” hit footfall in the UK – which accounts for about half of Primark’s retail estate – while its second-biggest market in Spain was hampered by the decline of foreign tourism.
ABF said the situation in the UK improved again from early August when self-isolation rules were eased. From that point Primark, which does not trade online, saw like-for-like sales recover from a 24% decline in the early part of the quarter to a drop of 10% in recent weeks.
READ MORE: Primark sets new sales records after lockdown restrictions ease
Chief financial officer John Bason said Primark remained optimistic about the key Christmas trading period, and despite some delays in the delivery of autumn and winter inventory caused by port and container freight disruptions, stores are not short of product.
“Is it easy in the supply chain? No…but it’s about delays rather than cancellations,” he said.
Profit margins at the operating level remained strong, helped by a significant reduction in labour and store operating costs. Combined with a robust performance by ABF’s food and sugar business, the group expects adjusted operating profits – before the return of £96 million of furlough cash – to be ahead of last year’s figure.
Revenues at ABF’s grocery division – which includes brands such as Kingsmill bread, Twinings tea, Ovaltine and Jordans cereal – are expected to be ahead of last year although operating profits have been driven lower by weaker corn oil margins in its North American ACH subsidiary. Profits will also be hit by a £5m charge for further restructuring in Allied Bakeries, where it is consolidating its UK plants and depots into a smaller number of larger sites, with resulting job losses.
The sizable sugar business had a strong fourth quarter with full-year revenue expected to increase by 7% on the back of a cyclical upturn in sugar prices in Europe and Africa. UK sugar production was down on the previous year due to adverse weather conditions, while demand across the whole of Europe is expected to be in excess of production again this year.
READ MORE: Primark owner to take £375m sales hit from latest Covid closures
The ingredients business, which provides items such as yeast and seasonings to food producers, is expected to post an increase in revenues and operating profits. Sales of animal feed through the AB Agri division were described as “well ahead” of last year.
Sophie Lund Yates, equity analyst at Hargreaves Lansdown, said the firm was “particularly impressed” by the stock control within Primark, where “huge quantities” of excess clothing from when shops were first forced to close last year have now been shifted. In addition, this has been achieved without “excessive discounting”.
She added that the group’s “idiosyncratic structure” has allowed it to navigate the uncertainties of the pandemic, with a resilient performance by the grocery and sugar division cushioning the difficulties in retail. With £2 billion of net cash, the balance is in a “healthy position”.
“The big question now is what ABF plans to do with that hoard, as it’s suggested it will build up a net debt position,” she said. “Options include a return to shareholders, acquisitions or investment in the business – perhaps into a better digital offering at Primark.”
Shares in ABF closed yesterday’s trading 46.5p lower at 1,923.5p. The group is due to report its full-year results on November 9.
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