Associated British Foods’ (ABF) annual update includes a profit margin warning for value retail chain Primark. And Frasers Group is among those expected to submit a revised bid for the 250-year-old Saville Row tailor Gieves & Hawkes.
As the U.K. mourns Queen Elizabeth II’s death Thursday following a seven-decade reign, new Prime Minister Liz Truss faces the daunting task of steering the British economy through heady inflation.
Primark profit watch
Inflation has put a damper on the profit margin forecast for Primark and its plan to keep customer prices intact. ABF said it expects the value chain’s profit margin for next year to be “lower than the operating profit margin of 8.0 percent expected for the second half of this financial year” ended Sept. 17. It’s scheduled to report full-year results on Nov. 19.
ABF said the U.K.’s comparable sales in the fourth quarter increased in the range of 13 percent year-on-year as people got back to their usual shopping habits once Covid restrictions fell. U.K. results were offset by weaker than expected performance in Continental Europe, where comparable sales were just 1 percent ahead of last year. In the U.S., where new store openings put total sales 27 percent ahead of pre-Covid levels, comparable sales were “close” to where they were prior to the pandemic.
ABF said Primark’s full year adjusted operating profit is expected at 9.6 percent for the financial year just ended, and the second half adjusted operating profit margin at 8 percent. Total sales is expected in the range of 7.7 billion pounds ($9.0 billion), or 40 percent ahead of last year at constant currency. ABF also said its “click and collect” trial is on track for a U.K. regional launch just ahead of the Christmas selling season, which will now include a “much-expanded range of children’s products.”
ABF said the company has made good progress in “developing a strong pipeline of new stores in line with our ambition to grow the store estate to some 530 stores by the end of our 2026 financial year.” Most of the new stores in the next year are in the U.S., France, Italy and Spain.
ABF said it expects sales growth next year through new stores and like-for-like growth increases. “Primark has already been managing the challenges of supply chain disruption, inflation in raw material and energy costs and in labour rates,” ABF said. It noted that in addition to price increases, ABF plans to improve store labor efficiency and deliver on lower operating costs at Primark. The company also cited the strong U.S. dollar against the pound sterling and euro, along with volatile energy costs, as headwinds. Separate from what’s already completed or planned, ABF said there won’t be any further price increases for the next year. “We believe this decision is in the best interests of Primark and supports our core proposition of everyday affordability and price leadership,” ABF said.
Gieves & Hawkes Update
Revised bids are due this week for Gieves & Hawkes, the tailor servicing the British royal court. The label was put up for sale in July by liquidators for parent firm Trinity Group, which in turn was impacted by the financial struggles of corporate owner Shandong Ruyi. Trinity purchased the menswear retailer in 2012 for 32.5 million pounds ($38.7 million) plus earnouts.
Acquisition-hungry Frasers Groups, which last month offered $16.5 million for the remaining shares of MySale, is among the bidders for the Saville Row tailor. Others believed to be interested include private equity firms and Marks & Spencer, financial sources said Monday.
Prime Minister Liz Truss’ energy-freeze plan
On Thursday, Truss unveiled a plan to freeze skyrocketing energy prices for millions of households that would go into effect next year for 24 months. The move is aimed at helping households deal with inflation, which would potentially free up some of their money to spend on nice-to-haves like new clothes and shoes. But it wasn’t immediately clear what her plans might be for the business rates multiplier, a commercial tax retailers hope will be frozen for the next two years to protect them from inflation-fueled increases.
Since October 2021, the British Retail Consortium (BRC) has been pushing to cut business tax burdens to prevent further store closures and job losses. Without any substantial reduction in place, “four out of five retailers would be forced to close additional stores across the country,” the BRC said.
Michael Ashley’s Frasers Group has been particularly vocal about the need to shave down the business rates, and new CEO Michael Murray said in July when reporting yearly results that the costly tax could amount to as much as 50 percent of a store’s annual rent. He said consumers will still flock to stores for the experience, but explained that soaring construction and store improvement costs plus the “archaic business rates regime” created an “extremely challenging environment to open and operate physical stores.”
In August while still campaigning against former finance minister Rishi Sunak, reports suggested that Truss would consider a tax cut. She also is said to be reviewing a 5 percent value-added tax (VAT) reduction across the board, which would also help struggling households.