Primark profits to rise as markdowns and stock management pay off
Associated British Foods says higher operating margins will help boost Primark’s bottom line.
Budget fashion chain Primark is on course for higher annual profits as strict stock management and markdowns start to pay off.
Associated British Foods said in a trading update that it expects Primark’s bottom line to grow thanks to higher operating margins.
“Stock has been tightly managed and markdowns, although higher than the very low level achieved last year, will be better than previously expected and, as a result, the profit from Primark will now be higher than expected,” AB Foods said.
It also expects to feel the benefits of a weaker US dollar on its purchases.
However, it is not enough to offset a decline in profits at its sugar division, which is being knocked by low EU prices, forcing AB Foods to stand pat on its full-year outlook.
The group logged a 2% rise in like-for-like revenue over the 40 weeks to June 23, which grew to 3% when stripped of currency effects.
Third-quarter sales were up 4%.
Its year-to-date sales were helped by a 7% rise in Primark revenues, at actual exchange rates, thanks to a larger store footprint.
It gained an extra 400,000 square feet in the third quarter, and opened seven new stores, including Munich in Germany, Metz in France, Antwerp in Belgium, Valencia in Spain, Tilburg in the Netherlands, Burnley in Lancashire and in the Westfield London shopping centre at White City.
However, new store launches in Toulouse in France and Ingolstadt in Germany have been delayed, and are expected to go ahead in the next financial year.
AB Food expects to add a further 100,000 square feet of selling space by the end of the year, with a new store in Brooklyn and the relocation of its Islazul Madrid site to a larger store.
Primark has been battling weather-related doldrums in recent months, having last reported a hit from an unusually warm October and the wintry conditions brought in by the Beast from the East in the spring.
AB Foods had signalled in April that profit growth would ramp up in the second half of the year.
Group revenues in the year to date have otherwise been stung by AB Sugar, which saw revenue tumble 17% in the third quarter alone.
AB Foods said it was “entirely the result of significantly lower EU prices which adversely affected our UK and Spanish businesses”.
Stripped of its sugar division, year-to-date like-for-like sales jumped 6% at constant currencies and 5% at actual exchange rates.
EU sugar prices have declined amid a drop in global prices, as well as a supply glut following very high production in the EU last year.
“For our next financial year, this level of EU sugar prices would represent a substantial reduction compared to those achieved this year,” the trading update said.
“As a result, our expectations for sales and profit at AB Sugar, both for this financial year and next, are lower than previously expected.”
Third-quarter revenue at the company’s agriculture division “remained strong” up 12%.
AB Foods shares were down as much as 3.7% in morning trading.