Booming business at Primark prompts ABF to lift earnings forecast

Reuters
A Primark clothing shop is seen in central London
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A Primark clothing shop is seen in central London, April 25, 2013. REUTERS/ Paul Hackett

By James Davey

LONDON (Reuters) - Another storming performance from Primark prompted owner Associated British Foods to raise its annual earnings guidance on Thursday, after the discount retailer's new stores and warm-weather fashions lifted quarterly sales still higher.

Primark's performance, along with AB's grocery and ingredients business, was strong enough to offset tough conditions in the company's sugar business where prices are falling, as well as the impact on the translation of earnings from the strength of sterling.

"It really is Primark firing on all cylinders," AB Foods Finance Director John Bason told Reuters, after the retailer reported a 22 percent rise in sales at constant exchange rates for the 16 weeks to June 21, its fiscal third quarter.

As a result AB now expects adjusted earnings per share for the 2013-14 year to be ahead of the 98.9 pence made in 2012-13. Previously it had forecast they would be unchanged.

Bason said Primark's performance reflected sales - at stores open over a year - higher than the 4 percent growth recorded in the first half, as well as a 10 percent increase in selling space year-on-year and helpfully warm weather in the period which brought customers flocking to buy summer fashions, in contrast with a very cold March and April last year.

Analysts at Jefferies estimated the like-for-like sales increase at 8 percent.

Primark now trades from 275 stores in nine European countries. It said plans to enter the U.S. market towards the end of 2015, announced in April, were on track and Bason added initial capital investment in the U.S. project would be "less than 200 million pounds," mainly made in the 2014-15 year.

Primark's fast-changing fashion at rock-bottom prices has proved an enduring hit with customers whose buying patterns changed during times of austerity and have not switched back significantly since. By contrast Marks & Spencer , Britain's biggest clothing retailer, posted a 1.5 percent fall in first quarter like-for-like sales for its general merchandise division on Tuesday.

SUGAR PROBLEMS

Shares in AB Foods, 55 percent owned by the Weston family, have soared 61 percent over the last year, mainly on the back of Primark's success.

But they were down 2.1 percent at 2,937 pence at 0943 GMT (10.43 p.m. BST) on Thursday, valuing the business at 23.2 billion pounds, reflecting a cautious outlook for sugar that has prompted a further restructuring of the business.

AB Foods has previously guided that lower sugar prices, as the market adjusts ahead of EU regime reform in 2017, will mean a substantial reduction in profit from sugar in 2013-14.

On Thursday the firm said sugar sales for the 40 weeks to June 21 slumped 20 percent, driven by substantially lower sugar prices, weaker EU sales volumes and lower sugar production in north China.

It also reiterated that the likely negative impact on full-year adjusted EPS arising from currency translation, if current exchange rates prevail, would be about 50 million pounds.

Group revenue from continuing operations was 2 percent below the third quarter last year but 2 percent ahead at constant currency.

Third quarter ingredients sales at constant currency were up 9 percent, while at the grocery division, which includes Kingsmill bread and Twinings tea, sales were down 5 percent.

AB is planning to cut its sugar business overheads further, an exercise which will mean a restructuring charge of 20 million pounds in 2013-14.

Analysts expect another major decline in sugar profits in 2014-15.

(Editing by Sophie Walker)

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