ii view: Primark owner AB Foods plunges to 10-year low

Shares in this major retailer and food manufacturer have almost halved since April last year. We assess prospects.

Full-year trading update to 17 September

• Group outlook for this financial year unchanged, with growth in operating profit expected
• Now expects adjusted operating profit for the year ahead to be below this year

ii round-up:

Food maker and Primark owner Associated British Foods (LSE:ABF) today issued a profit warning for the year ahead given the impact of increased energy prices and a strong dollar on the purchase of products from Asia. 

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Despite expected higher profits for its food business next year, and aided by product price increases, overall group adjusted profit is expected to come in lower than the current year due to issues at Primark.

AB Food shares fell over 8% in UK trading having come into this latest announcement down by more than a quarter year-to-date. They haven't been this low since October 2012. Shares for clothing and household goods retailer Next (LSE:NXT) are down 28% in 2022, while shares for Marks & Spencer (LSE:MKS) have almost halved. 

Overall adjusted operating profit for AB Foods during the current year to 17 September is expected to rise significantly from 2021, helped by a 40% increase in Primark sales to £7.7 billion, and following previous Covid disruption. That’s unchanged from management’s previous guidance. 

Primark’s like-for-like UK sales improved during this latest fourth quarter period to close to their pre-Covid levels, helping to counter weaker European sales. Revenues for the food business rose during the final quarter, assisted by hikes in product prices. 

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Net debt for the FTSE 100 company is expected to come in at around £1.7 billion including lease liabilities, up from £1.38 billion a year ago. Management will consider in November whether the company has surplus cash and capital available for return to shareholders. 

Full year results are scheduled for 8 November. 

ii view:

AB Foods operates across the five divisions of grocery, sugar, agriculture, ingredients, and retail. Its retail business Primark operates across the UK and Ireland, much of Europe and parts of the USA. Group strategic initiatives currently include expanding its Primark store numbers to over 500 outlets come 2026 from a current approximate 400. Brands for its food businesses include Twinings, Ovaltine, Mazzetti, Silver Spoon, Ryvita and Kingsmill.

For investors, energy cost increases and currency headwinds impacting profits at its Primark business are a concern. A cost-of-living crisis for consumers will make passing on cost increases to its customers challenging without hitting sales. Primark’s lack of a significant online presence over the course of the pandemic contrasts with that of clothing rivals such as Next (LSE:NXT), while shareholder returns are now under review given increased headwinds. 

More favourably, overall sales growth is expected for the year ahead, aided by product price increases. Action to bolster Primark’s online presence continues to be pushed, an increase in overall Primark store numbers is being targeted, while the group’s diversity of both product and geographical footprint is not to be forgotten. 

On balance, and while the relatively defensive offering of food and budget clothing provides some comfort, investors may wish to await signs of profit recovery before taking action. 

Positives: 

• Diversified business type and geographical footprint
• Expanding its Primark store numbers

Negatives:

• Uncertain economic outlook
• Many factors outside of its control like commodity prices and currency moves 

The average rating of stock market analysts:

Strong hold