LONDON (Reuters) - Associated British Foods said profit margins at its Primark business are set to benefit from the recent weakness of the U.S. dollar versus the pound, given that the fashion chain sources the majority of its goods in dollars from the Far East.
Primark, which trades from about 350 stores in Britain, continental Europe and the United States accounts for about half of AB Foods’ revenue and profit. The division has driven the group’s strong growth over the last decade as its fast fashion at discount prices has struck a chord with young consumers.
AB Foods said Primark’s operating margin in the first half of its 2017-18 financial year would be close to that of the previous year, with better buying terms virtually offsetting the adverse effect of the U.S. dollar exchange rate.
It forecast an improvement in Primark’s margin in the second half, driven by better buying and the recent weakness of the U.S. dollar.
The pound fell almost 20 percent versus the dollar in the months after Britain voted to leave the European Union in June 2016 but is up 5.4 percent against the dollar over the last three months and 8.6 percent over the last six months .
Primark would get a bigger benefit from the currency shift in its 2018-19 year, said AB Foods’ Finance Director John Bason.
Shares in the group, which also owns major sugar, grocery, agriculture and ingredients businesses, were up 2.3 percent at 1105 GMT, after it also maintained its overall full year outlook, forecasting progress in both adjusted operating profit and adjusted earnings per share (EPS).
“With further reassurance that margins are stabilising at Primark...and no further downgrades to the sugar business, earnings momentum is moving back in the right direction,” said analysts at Investec, who have a “buy” rating on the stock.
AB Foods forecast flat adjusted operating profit for its first half to March 3, held back by a previously flagged reduction in sugar revenues. However, lower finance costs and a lower tax rate would lead to higher adjusted EPS.
AB Foods made adjusted operating profit of 652 million pounds ($913.7 million) in the first half of its 2016-17 year and adjusted EPS of 59.7 pence.
Total first half sales at Primark were forecast to be up 7 percent at constant currency rates, with like-for-like sales seen up 1 percent in the final 16 weeks of the period.
The group forecast first-half sales growth in all of its other businesses apart from sugar.
Prior to Monday’s update the group’s shares, majority owned by the family of CEO George Weston, had fallen 6 percent this year, partly reflecting the outlook for its sugar business.
In January it had warned that revenue and profit from sugar would fall more than previously forecast in 2017-18 because of lower prices across the EU.
Editing by Keith Weir