Must read weekly preview: AB Foods, M&S, Next

Associated British Foods FY – Tuesday 3 November

Associated British Foods (LSE:ABF) has had a testing year, and the September trading statement left the bears with plenty to feed on. The Grocery business, second only in size to Primark as a main group contributor, was subject to a downgrade on an already reduced adjusted 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 for the full year is now expected to come in at the higher end of the previously guided £25-60 million range, and has been concerningly extended to a range of £70-170 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. 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.

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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.

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. The shares have fallen by 10% so far this year and by 16% over the last 12 months and are currently well out of favour with investors. It is unclear whether AB Foods will be able to spring any positive surprises in this update.

Marks & Spencer HY – Wednesday 4 November

Differing fortunes for its Food and Fashion businesses have largely cancelled each other out, with Marks & Spencer Group (LSE:MKS) shares having risen by just 2% over the last 12 months. However, more recently there have been some signs of recovery, as evidenced by a share price gain of 25% in the year so far which, while not erasing earlier losses, nonetheless marks a turnaround in investor sentiment. The price remains up by 92% over the last three years and investor support in restoring M&S to its former glories is in evidence.

The remaining vestiges of the cyber attack which blighted the group last year will show in the comparative numbers, when M&S reported half-year profits of £184.1 million. A figure of around £390 million is expected this time around which would be a significant improvement, if still shy of the £413.1 million achieved two years ago.

The threat to the business was never existential, but nonetheless had a significant impact on sales. It remains to be seen how much of the business lost during the disruption will be recovered, not least in a Fashion, Home and Beauty unit which accounts for 22% of group revenues. The online outage left a mark on the group’s reputation as well as inflicting some material damage. Adjusting items for last year totalled £292.1 million, including £131.3 million related solely to the attack, although M&S was able to recoup £100 million in its insurance claim.

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More positively, the group noted that its new season sales were showing some strong signs of resonating with shoppers, playing into its new target market of the “modern mainstream customer” as the company attempts to throw off the shackles of a previously dowdy and tired image, including but not limited to both women’s and men’s categories.

That said, there is little doubting the ongoing resilience and strength of the Food business, which accounts for 56% of group revenues. Last year, sales increased by 7% to £9.7 billion over the year, reaching a new milestone market share for the group along the way, and where innovation and quality upgrades continue to propel performance. Prospects remain bright for the unit, which is a clear focus of the group’s push for growth in terms of new stores and general investment. Indeed, quite apart from the enduring appeal of its specialist food ranges, the nature of these revamped stores has led to a noticeable increase in customers choosing M&S for their full shop, while the impending festive season is one where M&S traditionally prevails.

Investors will also be expecting an update on Ocado Retail, which remains a work in progress with increasing signs of improvement. Revenues are growing and an adjusted operating profit marked an inflection point, even if reaching this stage has taken longer than had been initially hoped.

Next Q3 – Thursday 5 November

The singular strength of this slick and well-regarded company rarely if ever disappoints, and the interim results in September were true to form. Next (LSE:NXT) reported revenue for the half had jumped 9% to £3.54 billion against a market estimate of £3.42 billion, with pre-tax profit growing by 10.5% to £569 million, resulting in the almost inevitable profit upgrade. Guidance for full-year pre-tax profit was raised to £1.255 billion from a previous £1.243 billion, which would represent growth of 10.3% from the corresponding period. Full-price sales are expected to grow by 6.7% to £6 billion, all underpinned by the group’s aims of improving product, international growth, upgrading its infrastructure and controlling costs.

Meanwhile, shareholder returns remain another major investor attraction, swinging between share buybacks or special dividends depending on the level of the share price. At present, the share buyback is effectively on hold given the group’s new threshold of £135 per share before continuing with the programme. As such, the pendulum has swung to the dividend, which including specials is currently running on an attractive 4.2% yield and the balance of excess cash will find its way back to shareholders via either route.

The swan-like performance of the group, with visibly serene and graceful moves propelled by invisible furious paddling, is no accident. Next has a forensic approach to each and every line of its business which results in any number of small and incremental wins which in aggregate lead to relentless growth. An obvious example of this is the international business, which saw full-price sales growth of 23.9% over the half-year and 59% compared to two years ago. There is a combination of factors here. On the one hand, digital marketing has proved so successful that it allows for more of the same, which creates a virtuous circle.

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Much has been made across the sector of the inflationary impact of higher energy prices from the current conflict which threatens to heighten input costs as well as crimp consumer demand. The group, which has a 6% of overall sales exposure to the Middle East, has responded to the threat by setting aside £47 million for additional costs, although the figure will be offset by savings and price increases elsewhere. Next is nonetheless mindful that should the conflict carry on for an extended period, some suppression of sales would inevitably follow.

Even so, Next has shown its mettle once more in a famously competitive environment, in which it is seen as something of a bellwether. The share price has risen by 13% over the last year and by 120% over the last three years, which is a considerable achievement given the traditional restraints which retail stocks face. And, while the share price and the valuation may be breaking new and uncharted territory, so are growth and profits. The bar is set high.