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AB Foods' Primark outlook improving as inflation weighs on food businesses

AB Foods sees first half 'strongly ahead' of prior year on improved Primark
AB Foods sees first half 'strongly ahead' of prior year on improved Primark   -   Copyright  Thomson Reuters 2022
By Reuters

By James Davey

LONDON -Associated British Foods said on Monday the outlook for its Primark fashion business was improving, though it cautioned its food businesses were facing increasing inflationary pressures.

The group said sales and adjusted operating profit for its first half to March 5 would be “strongly ahead” of the prior year and ahead of pre-COVID 19 levels, reflecting a better performance from Primark.

Primark’s sales were forecast to be well over 60% ahead of last year at constant currency with an operating profit margin of 11%.

The improved outcome reflected all Primark stores remaining open and trading throughout the period except for short spells in Austria and The Netherlands. That compared to prolonged periods of store closure in the UK and Europe in the first half of last year.

“Omicron really reduced footfall in December but now across the piece we’re seeing footfall improving,” finance chief John Bason told Reuters, highlighting strong demand for luggage and swimwear.

The effect of inflation on raw materials and the supply chain in Primark was broadly mitigated by a reduction in store operating costs and overheads and a favourable U.S. dollar exchange rate. It said in January it would not raise prices for spring/summer.

The group said all its food businesses had experienced increasing inflationary pressures in raw materials, commodities, supply chain and energy.

Steps have been taken to offset these higher input costs through operational cost savings and in the grocery, ingredients and agriculture businesses, the implementation of price increases. However, the group cautioned the price rises inevitably lag input cost inflation.

As a result, it expects some margin reduction in these three businesses at the half year but expects a recovery by the financial year-end.

Shares in the group were down 2.9% at 1009 GMT.

AB Foods’ grocery brands include Twinings tea, Jordans cereals, Kingsmill bread and Ovaltine drinks.

Bason also cautioned that Russia’s invasion of Ukraine could drive global wheat prices higher.

The group expects further growth in profit at AB Sugar at the half year.

AB Foods outlook for the full year was unchanged with “significant progress” expected in both adjusted operating profit and adjusted earnings per share.