Associated British Foods plc (LON:ABF) saw its shares fall this morning as worries over cost pressures in its grocery business and expectations for currency tailwinds to reverse offset a raised its outlook for full year 2016/17 results thanks to a strong performance from its Primark fashion retail business.
In early morning trading, AB Foods shares were 1.2%, or 39p lower at 3,226p.
READ: Primark’s performance once again out of the top drawer for conglomerate AB Foods
In a pre-close trading update, the FTSE 100-listed firm said its grocery revenues from continuing businesses are expected to be level with last year while adjusted operating profit is expected to be lower.
The group pointed out that margins declined at its Allied Bakeries business as a result of a very competitive UK bread market and inflationary cost pressures.
In a note to clients, Neil Wilson, senior market analyst at ETX Capital pointed out: “Grocery sales are expected to be flat with profits lower. Part of the reason for this seems to be the proliferation and popularisation of supermarket own brand goods. In particular own-label brands are the staple of the likes of Aldi and Lidl which are growing market share in the UK, which appears a net negative for ABF as they prefer to stock their own goods.”
He added: “With the worst of the pound’s weakening over and the currency now stabilising, no translation benefits are expected next year. Due to the timing of forward contracts and hedges, dollar strength will hit Primark in the first half, with euro strength will offset this in the second half."
Expects to report good full-year growth
However, for the full-year just ended, AB Foods said it expects to “report good growth in adjusted operating profit and adjusted earnings per share for the group”.
It added that Primark had “experienced an even lower level of markdown” in the fourth quarter, helped by favourable weather, which has further improved the group’s full year outlook.
AB Foods said Primark's full year sales are expected to be 13% ahead of last year at constant currency, driven by increased retail selling space and like-for-like sales growth of 1%, while at actual exchange rates sales are expected to be ahead 20%.
The group added: “Primark has performed particularly well in the UK where full year sales are expected to be 10% ahead of last year on a comparable basis and our share of the total clothing market has increased significantly.”
It continued: “Favourable weather in the fourth quarter and the strength of our consumer offering resulted in markdowns at lower levels than normal. Early trading of the new autumn/winter range has been encouraging.”
In the US, Primark opened three stores during the year and the group said its ninth store is scheduled to open next year in Brooklyn, New York.
On the food front, the firm said AB Sugar's revenue and adjusted operating profit will be well ahead of last year on a comparable basis, while revenues for its Ingredients business will be up on last year and operating profit will again be well ahead with a further increase in margin.
Balsamic vinegar expansion
AB Foods also unveiled an acquisition today, announcing an agreement to acquire Acetum SpA., the leading Italian producer of Balsamic Vinegar of Modena, one of the best known vinegars in the world.
No financial details of the transaction were revealed, by the group said, in the year ended 31 December 2016, the Acetum business generated net sales of €103mln.
The group said: “We have ambitious plans to grow these brands and the acquisition will broaden our international presence in speciality foods.”
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