Another setback for AB Foods but Currys doing better

Associated British Foods

Unfortunately, there is plenty for the bears to feed on within this update from Associated British Foods (LSE:ABF) covering its fourth quarter to 12 September. The Grocery business, second only in size to Primark as a main group contributor, will be subject to a downgrade on an already reduced adjusting operating profit number, with weakness coming from the Twinings Tea and Ovaltine lines. This is quite apart from the distraction of the Hovis acquisition, which was completed in July and is now in the midst of integration into the group.

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Elsewhere, the Sugar business operating loss is now expected to come in at the higher end of the previously guided £25 to £60 million range, and has been concerningly extended to a range of £70 to £170 million next year. Low European sugar prices, higher gas costs and lower yield expectations for the 2026/27 UK beet crop following the recent spell of prolonged hot and dry weather, have all played a part in the worsening outlook.

It is moot as to whether Primark’s current performance is a strong advert for a standalone business, which is currently expected to complete by December next year. While sales for the year are expected to have grown by 2%, this is all but driven by new store openings and its franchise model in Dubai and Kuwait.

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On a like-for-like basis, sales fell by 3% in the fourth quarter and by 2.6% for the year as a whole. Europe continues to drag on the numbers amid weak consumer confidence, with like-for-like sales declines of 4.3% in the final quarter and 4.7% for the year. Accounting for 47% of Primark sales, this is a meaningful miss and the group is planning to strengthen its presence and customer proposition. Actual sales in the US fared rather better, with growth of 13% for the year but, representing just 6% of group sales, the region remains something of a “jam tomorrow” contributor.

It is a timely reminder of the difficulties of listing as a pure retailer in investment terms, as evidenced by the poor recent reception to rival Shein’s much-vaunted IPO in Hong Kong, which could yet prove to be a salutary warning. In the meantime, and for the group as a whole, the weight of a loss-making Sugar business, stuttering Grocery and Agriculture units and the eventual loss of Primark as a standalone stock is currently too much for investors to bear.

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Despite maintaining guidance for the year on adjusted operating profit, this number is the result of a previous profit warning earlier in the year which has weighed heavily. Indeed, even prior to today’s precipitous drop, the shares had fallen by 10% over the last year, as compared to a gain of 16% for the wider FTSE100, and the market consensus has recently deteriorated to a sell with no obvious remedies in sight.

Currys

Currys (LSE:CURY) is currently on something of a roll, previously bolstered by a glowing performance over its peak festive trading period which led to a profit guidance upgrade which the company went on to achieve.

An additional recent highlight has been the performance of its Nordics business, previously a material thorn in the side for the group, given it accounts for 40% of overall revenues. The omnichannel offering is beginning to hit the spot, while market share gains, strong demand for white goods and mobiles and a broadly stable gross margin are all helping the healing process. Like-for-like revenues have risen by 9% over the period in a show of ongoing recovery.

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The rest of the group’s business is in the UK & Ireland, which saw like-for-like revenues increase by 6% in the 17 weeks ended 29 August, and where the strategy to target higher margin revenue streams provides a strong backdrop and also brings recurring income, such as its mobile plans, Care and Repair, credit provision and protection plans. iD Mobile subscribers rose by 16% year-on-year to 2.7 million, with at least 2.8 million expected by the end of the year.

The group’s omnichannel offering continues to bear fruit, and indeed two-thirds of customers prefer to shop in store, partly as a result of the expert advice available on a face-to-face basis. This can also lead to a longer relationship with the customer as well as the potential of cross-selling. In the meantime, momentum has been maintained and the group gained market share in each of its categories, despite a flat wider market which even the World Cup and summer heatwaves could not rescue.

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Overall, the group is maintaining its guidance for full-year adjusted pre-tax profit to be in the region of £199 million, with net cash expected to be well in excess of the £100 million target and a far cry from the group’s previous position, with a reduction of more than £900 million in debt since the lows of 2019.

Meanwhile, an ongoing share buyback programme of £50 million is price supportive, while the parting comment of the previous CEO that the group was “trending in the right direction on every dimension that matters” seems to be playing out. Indeed, the shares have risen by 12% over the last year, in line with the gain of the wider FTSE250, and by 92% over the last two years. On this showing, there is little to suggest that the market consensus of the shares as a strong buy will be troubled.