Associated British Foods (ABF) told investors to brace for a $2 billion hit from an inflation and spending slowdown double whammy but doesn’t plan to hike sticker prices at its popular clothing chain Primark.
In a Nutshell: “Primark has faced significant input cost inflation and sharply moving currency exchange rates. We have decided to hold prices for the new financial year at the levels already implemented and planned and to stand by our customers, rather than set pricing against these highly volatile input costs and exchange rates,” ABF CEO George Weston said.
The chief executive believes “this decision is in the best interests of Primark, supporting our core proposition of everyday affordability and price leadership and supporting market share growth over the longer term.”
ABF expects Primark’s adjusted operating profit margin next year to be lower than 8 percent. “We remain focused on returning to an adjusted operating profit margin of some 10 percent as commodity prices moderate and consumer confidence improves,” Weston said.
Volatile input cost inflation will be the “most significant challenge in the new financial year,” Weston said, though ABF businesses will try to recover the higher costs “in the most appropriate way.”
ABF is “considering” repositioning its business in Germany to boost sales and make it “sustainably profitable,” he added.
The company will open a net 1 million square feet in Primark retail selling space in the fiscal year that started on Sept. 18. “We have demonstrated that our U.S. store model is profitable and believe that the opportunity ahead is substantial; we expect nearly to double our retail selling space in this new financial year,” Weston said. Finance director John Bason will retire and become chairman to a new Primark strategic advisory board.
“Whilst we continue to offer safe, nutritious and affordable food and affordable, quality clothes to our customers, the full consequences of the current cost of living crisis remains uncertain. The impact on our businesses will depend on the extent of government intervention and the duration of any economic downturns,” ABF chairman Michael McLintock said, citing a possible “prolonged period of stagnation.”
ABF’s isn’t the only one trying to stay the course despite inflation.
In September, John Lewis Partnership reported a first-half loss for the six months ended in August but didn’t take a profit so it could aid workers, customers, communities and suppliers. It doubled the staff’s financial assistance to 800,000 pounds ($917,746) and said it would spend 45 million pounds ($51.6 million) for pay increases and bonuses. Employees got free food at work, as well as one-time cost of living payments.
Net Sales: ABF Group revenue rose 22 percent to 17 billion pounds ($19.65 million).
Revenue at value chain Primark jumped 38 percent to 7.7 billion pounds ($8.9 billion) from 5.59 billion pounds ($6.46 billion).
ABF said Primark for the year saw a “significant increase” in customer footfall as markets emerged from pandemic restrictions. Weak comparable sales in Continental Europe reflected cautious customer sentiment. Primark continues to build its digital capability and a new UK website as well as trial Click and Collect in 25 in-country stores.
Earnings: Operating profit rose 46 percent to 1.18 billion pounds ($1.36 billion), on earnings per share (EPS) of 88.6 pence ($1.03).
On an adjusted basis, operating profit was up 42 precent to 1.44 billion pounds ($1.66 billion), with adjusted EPS at 131.1 pence ($1.51).
Adjusted operating profit at Primark skyrocketed 136 percent to 756 million pounds ($873.8 million) from 321 million pounds ($371.0 million).
“Our outlook remains unchanged. We continue to expect Group adjusted operating profit and adjusted earnings per share to be lower than the financial year just closed,” Weston said.
Primark bumped prices for autumn/winter products as well as and items arriving for spring/summer 2023. That plus more store space should stimulate Primark sales growth, Weston said.
CEO’s Take: “Looking ahead to this new financial year we expect to make significant progress in Primark’s digital development with the launch of our new enhanced website in all our markets along with the UK launch of our trial Click and Collect service,” Weston said.