Even value retailers are being hurt by inflation and the cost of living crisis
Thursday 16 Jun 2022 Author: James Crux

Associated British Foods’ (ABF) third quarter trading update on 20 June will provide investors with a window into the fortunes of its budget clothing arm Primark and whether sales and profits have started to tail off.

Shares in the FTSE 100 foods-to-fashion conglomerate were priced at £15.72 at the time of writing, languishing near five-year lows. The market is worried about the impact of cost inflation across the business and the pinch from rising prices on cash-strapped consumers’ capacity to spend on its grocery brands, clothing and accessories amid a worsening cost of living crisis.

During tough economic times, customers increasingly seek out value for money, which should in theory benefit the likes of Primark.

However, retailers with value-based propositions also operate on razor-thin margins, with skinny returns on sales making them more vulnerable to inflation than those with fat margins and pricing power.

This risk factor was demonstrated by a shock profit warning on 31 May from variety discount store B&M European Value Retail (BME). While the company has retained customers won during the pandemic, over the first eight weeks of its new financial year, B&M UK’s like-for-likes sales were down 13.2% and 11.5% versus 2022 and 2021 respectively and the retailer warned trading patterns are expected to remain unpredictable in the year ahead.

Primark plans to make ‘selective’ price increases across some of its autumn/winter stock as it grapples with inflationary pressures.

Shore Capital argues Associated British Foods is ‘fundamentally undervalued, not least as global food security becomes much more important, and so valuable’.

‘Digitisation is creeping into Primark and while we are not anticipating a transactional capability any time soon, we do hope that click and collect/return is at least on the horizon. Should click and collect be so, we sense a strong positive share price reaction would ensue,’ says Shore.

Based on the consensus analyst forecast, Primark is expected to generate £7.8 billion revenue for the year to 30 September 2022, putting it back in line with sales from the 2019 financial year, according to Refinitiv data. On a group basis, Associated British Foods is forecast to generate £1.3 billion pre-tax profit, up from £908 million a year earlier.

Analysts have been steadily downgrading their earnings forecasts for the group since December 2021. At that point it was expected to make 139.54p earnings per share in 2022 and now the figure stands at 126.98p, according to Stockopedia, a decline of 9%. The share price has fallen by 20% over that six-month period.

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