Penneys owner AB Foods warns of lower margins next year

AB Foods says weak sterling will hit profits in 2019/20 after strong trading this year

Penneys/Primark warned on Monday that profit margins will fall in its new financial year as a weaker pound pushes up import costs. Photograph: Cyril Byrne

Penneys/Primark warned on Monday that profit margins will fall in its new financial year as a weaker pound pushes up import costs. Photograph: Cyril Byrne

 

Associated British Foods maintained its guidance for the 2018/19 year, forecasting good profit performances at its Penneys/Primark fashion chain and grocery business would offset a decline in its sugar operations.

However, it warned on Monday that profit margins at Primark will fall in its new financial year as a weaker pound pushes up import costs.

Shares in the group, which generates about half of its revenue and profit from Primark, were down almost 4 per cent in early trade, before recovering later to trade around 2.8 per cent weaker and paring gains for the year so far to 12 per cent.

The group said Primark’s margins would increase this year. However, it forecast they would fall in the 2019/20 year. “The strengthening of the dollar during this year and the recent weakening of sterling will increase the cost of goods for next year,” it said.

AB Foods’ finance chief John Bason pointed out that two-thirds of the group’s operating profit is earned outside of Britain. That means the group as a whole gets a translation gain from sterling weakening.

“But for Primark it’s a negative,” he said.

Primark’s performance in the current 2018/19 financial year has been solid, leading AB Foods to maintain its overall guidance for the year, which also reflected solid profits at its grocery business that includes brands such as Twinings, Ovaltine and Ryvita.

Sugar operations

They offset a decline in the group’s sugar operations.

AB Foods, which also owns major agriculture and food ingredients businesses, forecast adjusted earnings per share in line with 2017/18’s 134.9 pence. It said Primark’s full-year sales are expected to be 4 per cent ahead of last year, driven by increased selling space, but like-for-like sales are set to fall by 2 per cent.

Primark continues to win market share in Britain, although like-for-like sales are expected to decline 1 per cent in the current financial year in a soft overall market, the group said.

The outlook for sugar in 2019/20 was more promising.

‘Better visibility’

“We’ve actually got much better visibility on particularly EU pricing and an improvement in profitability in our European sugar businesses,” said Mr Bason. “There’s no doubt that 2018/19 will be seen as the low water mark for our sugar profitability, with a nice improvement next year.”

The group said its businesses had completed all practical preparations for Britain leaving the European Union and contingency plans were in place should it experience disruption at the time of exit. – Reuters