Lower profit forecast by Pennys owner ABF hits share price
SHARES in Primark and Penneys owner, Associated British Foods (ABF), plunged yesterday after the company pared back its earnings forecast for the full year, saying that it expects lower profit margins at the clothing chain in the second half of the year.
Releasing interim results yesterday, chairman Charles Sinclair said that second-half profitability will also be adversely affected by the higher cost of the group's sugar production in the UK and the high cost of third-party purchases that are being made to supplement supplies to customers.
Sugar beet production in the UK was badly impacted by the cold winter.
ABF, which is controlled by the Weston family that also owns Brown Thomas and Selfridges, has a number of business units and owns prominent brands such as Ryvita, Twinings, Blue Dragon and Kingsmill. It is the world's second biggest sugar producer and also operates a food ingredients division.
The company reported a 9pc increase in group revenue to £5.2bn (€5.86bn) for the 24 weeks to March 5, while adjusted operating profit climbed 5pc to £390m (€440m) for the period.
Its Primark unit, which has 214 stores, delivered an 11pc rise in revenues to £1.4bn (€1.57bn) for the first half of the ABF financial year, while they were 13pc higher on a constant currency basis. First-half profit at the unit rose 5pc to £151m (€170m) and was 3pc higher on a like-for-like basis. By comparison, operating profit in 2010 at Primark advanced 35pc. The cut-price clothing retail arm accounted for about 36pc of ABF's profits in its last financial year.
The company noted that despite clothing sales in continental Europe having been "encouraging" in the first half of the year, sales in the UK weakened after an initial strong start in the current financial year.
ABF said that profit margin at Primark in the first half was lower than last year, reflecting the absorption of higher VAT in the UK, and the adverse impact of higher input prices, especially cotton.
It warned that continuing weak consumer demand will also dent margins in the second half.
Chief executive George Weston said he is "determined" that Primark should hold on to its position as a price leader on the high street.
"Management's full-year guidance of flat adjusted earnings growth is significantly below our previous expectations," said analysts at research firm Sanford C. Bernstein.
"We expect significant downwards revisions to consensus expectations and, despite a very weak start to 2011, we see more downside from here."
Shares in ABF closed down 5.8pc in London.