City News: Associated British Foods issues gloomy forecast as Primark is hit by ‘market volatility’

Associated British Foods became one of the first major consumer multinationals to downgrade profit expectations this week, warning its Primark retail business would be hit by the strength of the US dollar and “significant market volatility”.

In a pre-close statement this week, ABF said group revenue for its current financial year would be well ahead of last year.

Its food business has seen higher revenues, reflecting price actions and some volume increases – especially in ingredients. Meanwhile, Primark posted ‘much higher’ revenues due to the end of Covid restrictions and the resumption of more normal customer behaviour. 

Adjusted operating profit for the group will also be significantly ahead of last financial year.

However, its outlook for the next financial year was less positive. ABF now expects adjusted operating profit and adjusted earnings per share to be lower than this current financial year.

Food profit is expected to be ahead of this year as ABF takes pricing action to mitigate significant input cost inflation. There will also be additional investment in growth initiatives and higher marketing spend. Sugar operating profit will be well ahead of this year, with grocery operating profit broadly in line.

However, Primark will come under margin pressure, despite sales growth driven by pricing and acceleration of its expansion.

The group expects significant market volatility to affect costs, including the strengthening of the US dollar at the end of this quarter and much higher energy costs. It also pointed to declining disposable income for consumers as a consequence of inflation.

ABF pledged to take significant action to mitigate input cost inflation, but said it had made the commercial decision to limit further pricing actions in the next financial year.

“The retailer now expects the cost of living crisis to limit volume growth,” AJ Bell commented. “Management does not wish to push prices too far to help maintain Primark’s value credentials, [which] means it will be much harder for the business to cope with input cost increases – be that raw material, shipping, logistics, staff and especially utility bills.”

Away from Primark, Barclays noted the picture remained “mixed”, with sugar revenues are expected to grow due to higher sugar and co-product prices. “On the flipside, grocery is facing challenges, particularly UK bread, where we estimate that losses have widened to £60m,” stated. “In our view these losses need to be addressed more aggressively.”

ABF shares slumped 8.5% on Thursday morning to 1,332p – a new annual low and the shares’ lowest level for a decade.