Primark's like-for-like sales went into reverse in the second half of its financial year, today's update from parent company Associated British Foods PLC (LSE:ABF) revealed, with sugar profits also lower than expected but a £100 million share buyback to help sugar the pill.
In an announcement that was brought forward from next week's scheduled date, LFL sales were revealed to have fallen 0.5% in the half year to 14 September, while total revenues were up 4% thanks to new store openings.
UK sales were worse, with LFL sales down around 2%, with a decline of 0.6% in the third quarter and around 3.1% in the fourth.
Chief executive George Weston said growth was impacted by poor weather, particularly in April and June, while the market was expecting growth nearer 7% for the year.
"While the British weather was not in Primark's favour this summer, robust growth in other markets and new store openings have driven good sales overall," said Weston.
Primark added eight new stores in Europe and there in the US, where sales grew by 25%.
Operating profits for Primark for the current year are "unchanged", Weston said, with adjusted operating profit margin for the full year expected to be "a little over 11.5%", a recovery compared to a year ago due to lower material costs, reduced freight costs and foreign exchange boosts.
"These benefits are being partially offset by labour cost inflation and increased investment in digital and data capabilities, technology and brand marketing."
ABF’s grocery and ingredients divisions also grew "well", the CEO said without providing precise numbers.
However, the sugar division's profitability was hit by a sharp decline in European sugar prices, which is expected to affect profits this year and next.
"Overall, we expect Sugar to deliver adjusted operating profit of approximately £200 million, which is still strongly ahead of last year but, due to a reduction in European sugar pricing, lower than previously anticipated," Weston said.
He expects strong cash generation this year, enabling the company to extend its share buyback with an additional £100 million, to be completed around the time of annual results on 5 November.
Investors not impressed
Shares in the FTSE 100-listed group fell over 8% on Thursday.
Analyst Susannah Streeter at Hargreaves Lansdown said Primark "weathered the storm of an unfortunate combination of rain and riots" in the UK, but its bricks-and-mortar focused model shows it’s susceptible to lower sales than rivals that make more use of the internet.
As many of the weeks in the period were marred by inclement weather and violent scenes in several British cities, "a new pair of sandals or bikini were hardly top of shopping lists for many amid the drizzle and despair", she added.
Primark has had a good run but it is not immune to the vagaries of the British weather and owner Associated British Food’s year-end trading update reveals the retail chain has been hit by the soggy summer.
Blaming poor performance on the weather "may not be the greatest look but it is understandable", said Russ Mould at AJ Bell.
Primark is at least benefiting from lower costs in some areas which are helping to increase margins, although in wages and investment in technology have gone up.
“With Primark not firing on all cylinders you might expect the wider group’s diversified model to come into its own but the company is also facing pressure in its sugar business where falling European sugar prices are having an impact," he said.
Ingredients and grocery units were "picking up some of the slack" and the overall message for next financial year looks positive, Mould felt, with a £100 million extension to its share buyback programme enabling management to "show some confidence".
** Update: Adds share price reaction and analyst comments **