Associated British Foods (LON:ABF) said sales for the first half rose 20% but warned operating profit would be flat over the full year as higher costs eat into margins.
Primark drove AB Foods higher revenue as sales jumped to £4.2bn, 19% above the same period a year prior at actual exchange rates. AB Foods said they expect Primark’s operating profit to be ahead of prior expectations for the full year as sales increase and costs rise less than expected.
However, rising commodity input prices for the sugar and groceries business are set to scupper any meaningful growth in their foods operating profit. Higher costs in their sugar business due to a poor UK beet crop are to blame for a predicted flat line in profits.
AB Foods shares were 1.4% at the time of writing.
“ABF expects group sales to jump up as consumer spending holds up better than anticipated. Primark’s had a big hand in underpinning the group’s increased sales performance, expecting to see double-digit growth as its customers find refuge from cost-of-living pressures in the value retail store,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.
“Despite being well positioned to deal with consumers’ shrinking budgets, ABF is not without its challenges, the main one being significant cost inflation. The group’s trying to offset this through price increases, but this risks alienating the value-chain’s core customer base. This means that cost increases haven’t been fully passed onto customers so far, resulting in Primark’s margins falling from 11.7% to around 8%.”