Primark getting squeezed by the strong dollar as profits set to fall
The strength of the dollar will continue to adversely impact margins at Primark in the current half of its new financial year, owner Associated British Foods (ABF) has warned.
Primark, which is headquartered in Dublin and trades as Penneys here, said that much of its merchandise is priced in US dollars at source. The currency has significantly appreciated against the euro in particular.
"However, more than half of the potential impact has been successfully mitigated by our buying teams as they have placed orders for next year," said AFB yesterday as it released full-year results for the 52 weeks to September 12.
ABF has significantly expanded the Primark retail chain over the past decade, extending its footprint across Europe.
It also opened its first store in the United States in September and plans to open seven more there in the coming year.
That first US store, in Boston, has been "trading well" since it opened, according to ABF chief executive George Weston.
The group's adjusted operating profit drop 6pc to £1.09bn (€1.53bn) in the financial year as it continued to battle food commodity deflation and the significant exchange rate movements.
Its adjusted earnings per share fell 2pc to £1.02. The results were slightly ahead of expectations, however.
Sales at Primark in the period rose 13pc as the amount of selling space at the chain increased by 9pc. Like-for-like sales were 1pc higher.
ABF said like-for-like sales in the early part of the last financial year - autumn 2014 - were impacted by unseasonably warm weather. Spring trading was curtailed by cool weather.
But it said that its stores in Spain, Portugal and Ireland all performed well throughout the year.
ABF opened 20 new Primark stores during the last financial year, increasing its selling space by one million sq ft to 11.2m sq ft. It now has 293 outlets.
It will open its first outlets in Italy next year. Primark's entry into the French market in 2013 has become its most successful foray into any new territory.
ABF also has interests in the grocery, sugar production and agricultural sectors.
The group is controlled by the Weston family, which also owns Brown Thomas, Selfridges, and now Arnotts.
The group has come to rely on Primark for growth as record global sugar supplies have led to a slump in profitability at that business. The weakness of the euro against sterling is also set to have a major adverse impact on ABF's sugar unit.
Primark generated sales of almost £5bn in the 2014 financial year, out of total group revenue of £12.9bn. It also accounted for £662m of ABF's £1.16bn adjusted operating profit.
Among the consumer grocery brands owned by ABF are Ryvita, Twinings, Ovaltine and Blue Dragon.
The company said that it expects profit in the current financial year to show a "modest decline".
The 2016 outlook "was much more cautious than expected," said Andrew Wood, an analyst at Sanford C Bernstein in London.
"If guidance turns out to be correct, this will mean two consecutive years of flat or negative earnings per share growth," he said.
(Additional reporting: Bloomberg)