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Shares in Associated British Foods are offside this morning after the release of its key Christmas trading update, despite flagship Primark stores bucking a wider retail slowdown on the UK high street.
Sales at the budget clothing chain improved 9% YoY, a record for the Christmas period, however accounting for constant FX the numbers were a little less impressive 7%. Furthermore, a disappointing overseas performance detracts from the group’s much rosier overall picture of revenues +4% YoY at constant FX; unseasonable warmth in October dented European sales, whilst despite making ‘progress’, the US is likely to remain a concern. A further blot on the report card comes from the group’s sugar business (14% of FY17 revenues, 15% of operating profit) as ABF noted revenues and profits from the division will be lower than previously forecast as a result of EU price declines, with all of the above contributing to today’s share price reaction.
However it’s not all doom and gloom, at least from AB Foods’ perspective. Primark’s exalted status as the cheap clothing retailer of choice for UK consumers is already seeing a sales benefit induced by a continued squeeze on incomes (high inflation vs weak wage growth) and subsequent cash conscious spending. Meanwhile, the lack of online outlet complemented by the propensity for compulsive in-store purchases leaves the business in an unrivalled position on the high street; as others scramble to bolster their ecommerce presence, Primark remains an online non-conformist.
Overall, the company has left its guidance unchanged amid a mixed Christmas stocking. And after a bumper Christmas, proving Primark can maintain sales to offset weakness elsewhere will be a key challenge when it publishes Q2 results in late February. For now, shares have retreated below 2800p, extending a sell-off from Tuesday’s bullish test of 2905p 1-month highs. Bulls will be encouraged by shares holding above December 2777p lows, however bears eye a break below for a monster bearish flag back towards 2017 lows.
Henry Croft, Research Analyst, 18 January 2018
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