When Associated British Foods PLC (LSE:ABF) issues an update on Monday the big question is whether its Primark fast-fashion chain has successfully weathered the compounding effects of inflation and rising interest rates that have taken a toll on rival retailers in recent months.
In particular, fellow fashion retailer ASOS PLC (LSE:ASC) issued a profit warning in the past week as consumer purses continue to tighten, with Boohoo Group PLC (AIM:BOO) saying inflation hit costs and its international competitiveness.
Asos cut its full-year profit guidance to reflect uncertain customer purchasing power, stating that inflation had a “disproportionate impact” on its profitability by increasing the volume of customer returns.
It's hitting all parts of the retail sector, with Tesco PLC (LSE:TSCO) saying on Friday that its UK sales fell in the first quarter, cautioning that "customers are facing unprecedented increases in the cost of living", while Halfords Group PLC (LSE:HFD) issued guidance that was a bit shaky due to inflation and declining consumer confidence.
As for AB Foods, back in its April interim results it predicted "significant progress" in its earnings per share and underlying operating profit this year, though it did warn that operating profit margins for Primark would be lower in the second half.
The FTSE 100-listed group posted revenue of £7.88bn for the first half of the year, a 25% uplift from the comparable period of the previous year, in its interim results statement for the six months to 5 March.
It expected second half Primark sales to be ahead of the second half of the 2019, ie pre-Covid, thanks to the easing of Covid rules across its markets and new store openings, meaning selling space at the end of this financial year will be 10% larger than at the end of the 2019 financial year.
"Reflecting further inflationary pressures, we now expect a greater reduction in the second half operating profit margin than previously expected."
Guidance was for 10% Primark margins for the full year, compared to the 11.1% that analysts had been forecasting, with adjusted operating profit in the second half expected to be ahead of the same period last year.
Broker Peel Hunt said at the time that it saw risks to numbers for the sector, "driven by a margin squeeze as the full impact of cost inflation is unable to be fully passed onto consumers".
Shareholders will be looking to see whether this upcoming update for the third quarter keeps the company on track for these sales and profit targets.