Associated British Foods this week reported a 22% increase in full-year revenue in the year to 17 September, with its Primark business seeing sales up 43% and its Food arm posting a 10% increase in sales.
Here's how leading industry analysts viewed its performance.
Richard Lim, Retail Economics
“These are impressive results against the harsh economic backdrop. The retailer is well-positioned to benefit from consumers who are trading down and putting lower costs at the heart of their buying decisions.
"Many shoppers are prepared to sacrifice perceived quality and the convenience of online delivery for lower costs, and it's driving people back into stores across parts of the sector.
"However, there's a perfect storm of cost pressures facing the retailer from spiralling input and operating costs and the impact of a weaker pound and rising interest rates. The retailer has taken a bold decision to stall price increases beyond the Spring/Summer season next year at the expense of profitability as they look to protect and build market share in the longer term.
"It's inevitable that margins will be hit, but they are likely to weather the storm better than most with a value-driven proposition and diversified business as the economy enters recession."
Cathal Kenny, Davy
"Associated British Foods’ (ABF) FY 2022 print was modestly ahead of our expectations, with a strong profit rebound driven by more normalised trading conditions at Primark. Of more pertinence, the outlook for FY 2023 remains unchanged, with management guiding to significant growth in sales, though with profits lower year-on-year (yoy).
"Current trading at Primark appears resilient, with “positive trading” noted in the UK and “some improvement” in Continental Europe – though margins will be weighed down by externalities. Following earlier hints, ABF has announced a £500m share buyback which, coupled with the total dividend, equates to a shareholder yield of 7.5%. We will hold our FY 2023 forecasts unchanged."
Louise Déglise-Favre, GlobalData
“Primark delivered substantial constant currency sales growth of 40% in FY2021/22 thanks to the return to relative normality following the pandemic as its stores remained open for whole period, unlike last year which was plagued by lockdowns.
"Consumer desire for affordable fashion amid the cost-of-living crisis contributed to its growth but was not enough to enable the retailer to exceed pre-pandemic levels, with like-for-like sales down 10% on FY 2018/19 due to a lacklustre Continental Europe performance.
"While Primark has increased its prices amid soaring inflation, operating profit margin was still lower than expected at 9.8%. It has committed to limit further price rises for the next financial year, but this will inevitably impact its profitability further, with operating profit margin now expected to be lower than 8.0% in FY2022/23.
"Despite this, Primark’s stance on prices will help make it more desirable as consumers increasingly cut back on non-essential fashion spend, and will allow it to better compete with its value and mass market competitors like the grocers, Matalan and Pepco, many of which are likely to pass additional costs onto consumers."
Russ Mould, AJ Bell
“Talk about a comeback. Associated British Foods’ sales and profit have jumped for joy like a shopper finding an absolute bargain. The company is fighting back from Covid with a vengeance, with its Primark chain seeing a big jump in sales as the world returns to a more normal state post-pandemic.
“The decision to now hold prices in Primark and sacrifice some margin as inflation remains high shows that it cares more about its customers than profits. It’s a calculated move which Primark hopes will earn it some with goodwill with customers as the company which understood the financial pressures people are under.
“Primark’s business model is based on shifting a large volume of goods at low prices. It relies on people browsing the aisles and popping items in a basket on impulse because they look cheap. There comes a level when a higher price will stop this shopping behaviour and Primark clearly doesn’t want to reach this tipping point. It seems to be taking the view that it’s better to have customers buy something at a lower margin than nothing at all.
“Fortunately, there are other businesses within the broader Associated British Foods group which can pick up the slack in terms of margins. It has been putting up prices in its food business to help recover higher input costs and the group is in a strong financial position.
Anubhav Malhotra, Liberum
"FY’22 results are slightly ahead of consensus expectations and FY’23E guidance reiterated. With leverage at 0.8x consistently below the 1.0x comfort level, the company has announced £500m share buyback (c. 4.7% of its issued share capital). There is also a 3.1% dividend yield which combined with the buyback total 7.8% returns to shareholders.
"On the negative, ABF is taking a £206m impairment charge to its German business and is also reviewing its total space in that market. Outlook for FY’23E is unchanged, with significant sales growth driven by price increases but adjusted operating profit and adjusted EPS to decline yoy, driven by lower profits at Primark.
"Shares look attractive trading on only 4.3x forward EV/EBITDA and 12.3x PE, but with Primark sales in Continental Europe still well below pre-pandemic levels, along with rising cost pressures we see continued pressures on margins with limited near-term catalysts."
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