Related British Meals, proprietor of Primark, the UK’s most-visited clothes retailer, warned on Tuesday that the sharp fall in sterling would erode the low cost chain’s profitability subsequent yr, since it might not increase costs to offset the upper prices.
However the FTSE one hundred conglomerate, which additionally owns Ryvita crackers and Twinings Ovaltine, stated it will profit general from the pound’s weak spot, particularly in its sugar enterprise. It stated it was speaking to the UK authorities about submit-Brexit agricultural and commerce insurance policies that would work in its favour.
ABF’s share worth was up by virtually 6 per cent in mid-afternoon London buying and selling. It had underperformed the FTSE one hundred by 24 per cent within the yr so far, on considerations concerning the efficiency of Primark, its principal progress motor and largest income contributor.
George Weston, chief government, stated that regardless of the brief-time period uncertainties about Brexit: “Modifications in laws and commerce agreements, notably within the areas of commerce tariffs and UK agricultural coverage, have the potential to profit the group, and the present degree of sterling provides UK meals producers vital alternatives to exchange imported meals and construct export markets.”
ABF reported pre-tax income of £1.1bn within the fifty three weeks to September 17, up forty seven per cent on the earlier yr. Nevertheless 2015 income have been hit by one-off prices within the sugar enterprise and underlying pre-tax income elevated by a extra modest 5 per cent. Gross sales rose 5 per cent to £thirteen.4bn, or four per cent in fixed foreign money phrases.
ABF confirmed the two per cent fall in like-for-like gross sales at Primark, which it had introduced in September — the primary annual drop in similar retailer gross sales on the quick-rising low cost trend chain in sixteen years.
Working income at Primark elevated 2 per cent to £689m however the chain’s revenue margin fell 1 proportion level to eleven.6 per cent, primarily due to the weak spot of the euro towards the greenback final yr.
However the pound’s fall is about to have a much bigger influence, as Primark buys most of its garments in dollars however sells fifty five per cent of its wares within the UK, the place it has outperformed many retailers, because of a mixture of low costs and quick style.
ABF stated it had no intention of risking Primark’s place as having the bottom costs on the excessive road. It stated: “The response of UK clothes retailers to this main motion in trade charges is presently unsure however Primark is dedicated to main the worth sector of the market.”
Primark accounted for forty four per cent of group gross sales however sixty three per cent of income. The chain has up to now been cushioned by the impact of the pound’s fall by ABF’s hedging technique however it will expire subsequent yr. “At present trade charges the impact [on Primark’s margins] shall be opposed within the new monetary yr,” ABF stated.
Jack Gorman, analyst at Davy Analysis stated: “An in-line efficiency at Primark doesn’t disguise the truth that it was a troublesome yr, given margin headwinds on sourcing compounded by a 2 per cent decline in like-for-like. Modest working revenue progress was achieved.”
ABF stated it might proceed the chain’s speedy enlargement with 1.3m sq ft of latest promoting area, up from the 1.2m sq ft delivered final yr, and was inspired by the chain’s efficiency within the US, which it entered a yr in the past.
The group was bullish about prospects for its sugar enterprise after a bitter interval during which income collapsed as a result of falling costs. It has minimize prices and restructured the enterprise and stated the top of EU sugar regulation subsequent yr represented a chance to extend manufacturing.
Working income rose in all its 5 divisions, aside from agriculture which provides animal feed and has been hit by low dairy and pig costs.
Analysts at Liberum stated: “Regardless of brief-time period considerations, ABF’s lengthy-time period fundamentals seem strong and we retain our conviction that Primark and sugar will energy midterm revenue progress. …..Whereas Primark margin takes the hit close to-time period from antagonistic transactional overseas change, we anticipate margins to recuperate from full yr 2018.”