April 23, 2013 9:14 am

Strong Primark growth boosts ABF profits

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Primark store©Charlie Bibby

Strong sales growth at Primark, the discount clothing store, helped drive a 10 per cent rise in interim revenues at Associated British Foods to £6.3bn.

George Weston, chief executive, pointed to “exceptional trading from Primark achieved during a difficult time for many retailers on European high streets” as pre-tax profits across the diversified group rose by 26 per cent to £415m.

ABF’s budget retailing arm took advantage of cheaper cotton prices, a fall in the dollar and limited markdowns to deliver a 24 per cent increase in revenues to £2bn across its network of stores in the UK and Europe.

Operating profits at Primark rose by 55 per cent to £238m for the 24 weeks to March 2 as it committed to expanding its footprint on the high street still further. “We are actively searching for appropriate locations in all the countries where we operate and in the next financial year we will open our first stores in France,” said Mr Weston.

“The Primark success story continues,” said company chairman Charles Sinclair. “Customers in continental Europe have taken enthusiastically to the Primark brand and there is very real momentum in the addition of selling space. Encouraged by this success, capital investment will continue.”

But the company cautioned that profits growth at Primark would moderate during the remainder of the year as it continued to expand store numbers.

ABF raised its interim dividend by 10 per cent to 9.35p, payable from adjusted earnings per share of 41.9p, noting that it expected its profits improvement for the year to be weighted towards the first half. Analysts at Panmure Gordon edged up their full-year earnings per share forecast from 95p to 96p.

‘The Primark success story continues . . . there is very real momentum . . . capital investment will continue’

- Charles Sinclair, company chairman

Elsewhere in the business, turnover at ABF’s grocery business that controls brands such as Twinings, Ryvita, Patak’s and Kingsmill bread edged ahead to £1.83bn as operating profits rose from £75m to £97m.

But profits at its sugar business fell in spite of a rise in turnover from £1.2bn to £1.3bn. ABF said it expected profits at its EU sugar operations to be lower than last year while a fall in prices would tip its Chinese sugar business into a loss this year.

The company ended the period with net debt £1.34bn, up slightly on the period in part because of the impact of a weakening sterling on foreign denominated borrowing, after making a net capital investment of £334m.

However, ABF said it had retired $120m of debt on a coupon of 6.3 per cent since the end of the financial year, and now planned to redeem £150m at a 10.75 per cent coupon in July. The two moves would substantially reduce the group’s future average cost of borrowing and not require additional refinancing, said Mr Sinclair.

Shares in ABF, up by more than a half on the year, rose 8 per cent to £19.99, valuing the company’s equity at £14.65bn.

FT Comment

The frocks may be of the moment, but the cash management is Dickensian – at least as espoused by Mr Micawber. ABF, with its heavy store roll-out plans, has capital expenditure running at well over twice depreciation, but it still saw far less free cashflow walk out the door: £15m versus £172m in the same six month period last year. This reflects a husbandry that is gaining more traction at companies big and small in a world where credit and covenants are tight. ABF has brought down its working capital to 10 per cent of sales, from a run-rate of around 14 per cent in the years to 2009. Inventories are smaller – as a proportion of sales – and so are receivables. Payables are broadly static. Depending on your viewpoint, that may leave opportunity for further improvement or to play the good corporate citizen (no squeezing of hard-pressed Bangladeshi textile workers). Either way, tying up less cash is smart.

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