For years, Associated British Foods Plc has relied on its Primark budget clothing chain for growth as its sugar business has struggled. Now the tables are turning.
The London-based company sees "significant profit growth" in sugar next year, Chief Financial Officer John Bason said in an interview Tuesday. That will help balance a slowdown at Primark, where same-store sales fell 1 per cent in the opening half of the financial year. The decline was the first in more than a decade, according to analysts.
"The profit outlook for sugar is better than expected," Richard Chamberlain, an analyst at RBC Capital Markets, said by e-mail. "We are concerned about sales trends at Primark."
The improving outlook for sugar couldn’t come at a better time for AB Foods. As a pioneer of the boom in budget clothing, Primark has driven the company’s growth in recent years, boosting its share of group profit to 59 percent from 32 per cent since 2012. By contrast, sugar profit has plunged amid a global glut of the commodity.
The outlook for sugar is helped by improving prices, according to Chief Financial Officer John Bason. The European Union white-sugar price rose to a 13-month high in January, according to European Commission data published Tuesday. The EU will face sugar shortages by mid-year as stockpiles fall to the lowest since at least 2006, the Committee of European Sugar Users said last week.
Cost-cutting measures saw AB Foods’ sugar business swing back to profit in the first half, helping the company beat analyst estimates. Adjusted pretax profit rose 4 per cent to £466 million ($667 million), compared with the £454 million median of 10 estimates compiled by Bloomberg.
AB Foods shares rose 2.1 per cent to 3,418 pence as of 9:40 am in London.
Primark’s slowdown will add to concerns over the outlook for the country’s fashion retailers.
"The UK has been tough," AB Foods’ Chief Executive Officer George Weston said in an interview, citing the recent impact on sales of unseasonably cool temperatures. "When the weather improves, we hope consumers will come back."
To offset the decline at home, Primark is expanding in the US and across Europe. Six more stores will open in the US later this year, along with another in New Jersey in 2017, bringing the total to nine, AB Foods said.
Weakening domestic demand at Primark was compounded by last year’s weakening of the euro against the dollar, which reduced the operating margin by 0.9 percentage points to 11.7 per cent. The decline was mitigated by good inventory management, AB Foods said.
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