AJ Bell press comment – 8 September 2022
- Primark profit margin dip forces ABF trading alert for 2023
- Fall in fast-fashion earnings to offset improvement from food operations
- ABF shares fall to levels last seen in 2013
“Higher input costs, a decision not to push prices too far and lower consumer confidence are all going to weigh on Primark’s profits in the year to September 2023 and as a result, Associated British Foods is putting out a profit warning,” says AJ Bell investment director, Russ Mould. “While the conglomerate’s food businesses continue to perform well, Primark believes profit margins fall in 2023 and come in well below the 10%-plus figure which has been the norm, excluding the years affected by COVID-19.
Source: Refinitiv data
“Primark now believes it will generate a return on sales which is lower than the 8% it expects to make in the second half of the year to September. That figure is itself a big step down from the 11.6% achieved in the first half of this financial year, from October to March, and below the company’s historic average.
Source: Company accounts, management guidance for 2022E and 2023E in September 2022 trading statement. Financial year to September.
* Numbers before 2013 not directly comparable owing to 2014's IAS19 accounting rules change on employee benefits.
** Numbers before 2019 not directly comparable owing to IFRS16 accounting rules changes on leases.
“The retailer now expects the cost-of-living crisis and the huge knock to both consumers’ confidence and disposable income to limit volume growth, although Primark still expects to increase its revenues thanks to new store openings and price increases. Unfavourable currency movements are a further complication, as Primark buys mainly in dollars and the greenback is rampant against the pound right now. Even so, management does not wish to push prices too far to help maintain Primark’s value credentials for its customers.
“This does, however, mean it will be much harder for the business to cope with the input cost increases it is seeing – be that raw material, shipping, logistics, staff and especially utility bills – and goes some way to explain the expected dip in the 2023 full-year profit margin to below 8%.
“Intriguingly, the forecast dip in margins in the coming financial year looks to extend a longer-term trend of lower returns on sales, even if the COVID-19 marred years of 2020 and 2021 are seen as an aberration. Margins peaked in 2014, just one year after the collapse of a factory used by Primark, and others, to manufacture clothes in Dhaka, Bangladesh. While inflation and higher input costs are now taking all of the headlines, the issues of supply chains and working conditions for staff in factories are not going away, especially after 2020’s allegations that Primark’s fast-fashion rival Boohoo was using sweated labour in the UK.
“The net result is Primark’s parent, ABF, is now acknowledging that its adjusted operating profit and adjusted earnings per share figures will drop in 2023 because the decline in retail earnings will more than offset an anticipated bounce from the Sugar, Groceries, Agriculture and Ingredients businesses.
Source: Company accounts, Marketscreener, consensus analysts' forecast before the profit warning of Thursday 8 September. Financial year to September.
* Numbers before 2013 not directly comparable owing to 2014's IAS19 accounting rules change on employee benefits.
** Numbers before 2019 not directly comparable owing to IFRS16 accounting rules changes on leases.
“Analysts had pencilled in a further increase, to build on the post-COVID rebound and the earnings disappointment helps to explain why ABF’s shares are down sharply and now change hands at levels last seen in 2013.”
