Associated British Foods – Profit Slumps At Primark

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Associated British Foods plc (LON:ABF) saw its first half revenue rise 17% to £9.6bn, ignoring the effects of exchange rates. This was thanks to growth across all business segments, and the key Primark business grew by more than expected, with sales up 17% to £4.2bn, thanks to higher prices and volumes.

Total underlying operating profit fell 7% to £684m. Profit across the Food businesses grew 4% to £373m, after a particularly strong performance from the Ingredients division. Profit at Primark fell 16% to £351m as the cost of goods, labor, energy and shipping all rose, and Primark decided not to pass the full extent of these rises onto customers.

Net debt, including lease liabilities, grew in-line with group expectations, rising from £1.8bn to £2.6bn. Free cash flow fell from an inflow of £188m to an outflow of £290m as the group spent £140m on share buybacks, inventory levels increased in the Sugar businesses and at Primark. These inventory levels are expected to reduce in the second half.

For the full year, underlying operating profit is expected to be roughly in-line with last year, which came in at £1.4bn. At Primark, the group remains “cautious” about the resilience of consumer discretionary spending.

The board has declared an interim dividend of 14.2p per share, representing a 3% increase on last year.

The shares fell 4.0% following the announcement.

Associated British Foods’ Profits Slump

Despite being well positioned to deal with consumers’ shrinking budgets, profits in the first half slumped at Primark. The group sold more goods at higher prices, but it wasn’t enough to offset inflated energy, labor and shipping costs.

This was because the value-chain made a conscious decision not to pass along the full extent of rising costs in order to avoid alienating its core customer base – but this meant the bottom line took a hefty hit.

The cost-of-living crisis remains a dark cloud over consumers’ heads, and Primark’s owners remain cautious about the outlook for consumers discretionary spending.

So in the short-term, jittery customers and inflationary pressures are likely to keep a lid on profits. But longer term, as inflation eases and commodity costs normalize, we think there’s plenty of room for Primark to restore margins.

Overall, Associated British Foods’ first-half results were as mixed as the wide array of goods it sells. Total revenues came in slightly ahead of its own lofty expectations, rising by an incredible 17%, ignoring exchange rate impacts.

One of ABF’s main strengths is its diversified portfolio of businesses, which includes many well-known food brands such as Kingsmill, Ryvita and Patak’s.

This diversification helps to spread out revenue streams, ensuring the company isn’t overly reliant on any one product or division. This bore fruit as the group’s food businesses helped to pick up some of the slack of falling profit at Primark.

Article by Aarin Chiekrie, equity analyst at Hargreaves Lansdown.