Associated British Foods PLC (LSE:ABF) said its Primark budget clothing chain will have to raise prices in order to counter the impact of higher inflation.
Chief executive George Weston said the company had been unable to offset inflation by cutting costs “and so Primark will implement selective price increases across some of the autumn/winter stock”.
“However, we are committed to ensuring our price leadership and everyday affordability, especially in this environment of greater economic uncertainty,” he added.
Although group sales and profits returned to pre-Covid levels in the first six months of its financial year, AB Foods cautioned that inflationary pressures will lead to a greater reduction in profit margins than previously expected in the second half.
The group posted revenue of £7.88bn for the 24 weeks to 5 March 2022, up 28% on the same period last year on a constant currency basis.
Adjusted operating profit grew by 91% in the period, while statutory pre-tax profits were 131% higher at £635mln.
A return to pre-pandemic trading levels was said to be driven by a strong recovery in sales and operating profit margin at Primark, which received a boost from the removal of Covid restrictions on store operations.
Primark’s sales surged 59% to £3.54bn driven by a strong recovery in the UK and Ireland.
The group’s food business struggled with cost inflation, supply chain challenges and Covid-related labour absences in the first half. Sales were 6% higher at £4.34bn, but adjusted operating profits fell 9% to £330mln, as price rises to mitigate against cost inflation lagged.
Looking ahead, AB Foods pointed out that commodity and energy prices have increased further following the Russian invasion of Ukraine and as a result, it expects a greater margin reduction in its foods businesses than previously expected for the full year. Margins are now expected to recover in the next financial year.
The group expects Primark sales in the second half to be ahead of the same period of pre-pandemic 2019. The second-half operating profit margin is forecast to be lower than previously expected, but the full-year Primark margin will still be around 10% and the adjusted operating profit in the second half will be ahead of the same period last year, it noted.
Weston was upbeat on the outlook for the rest of the year. “Notwithstanding the inflationary pressures we are experiencing, our outlook for the year is for significant progress in adjusted operating profit and adjusted earnings per share for the group," he said.
AB Foods raised its interim dividend to 13.8 pence from 6.2p last year.
Net cash before lease liabilities at the half year was £1.5bn, which compared to £705m a year ago. Net debt including lease liabilities at the half year was £1.7bn, giving a financial leverage ratio of 0.8 times.