Investors retreated from Associated British Foods this week as markets worried about a bleak consumer outlook after Primark’s sales came under pressure and the group’s grocery and sugar divisions also struggled.
CEO George Weston told The Grocer a combination of business rates, national insurance contributions and EPR (with the latter amounting to “tens of millions” for the grocery business and the same for Primark) had made life difficult for the group.
“On top of that the jobs uncertainty caused shoppers to pull back expenditure and we saw poor like for likes,” he said in an interview. “You won’t tax your way to growth, or achieve growth, if you remove the capacity to invest from British businesses.”
Shares slumped by more than 13% to as low as 1,936p on Wednesday as ABF released its second-half trading update for the six months to 13 September. It took the stock to the lowest level since April.
Discount fashion retailer Primark, which accounts for almost half the group’s £20bn in annual revenues, will register a 2% fall in like-for-like sales in the half, which was worse than analysts had predicted. Conditions were more subdued in Europe, with like for likes flatter in the UK. However, concerns over the potential impact of November’s impending Budget weigh heavy over the business.
The disparate nature of ABF means when one part of the group struggles, other divisions have the potential to offset the weakness. But the group warned profits in its grocery division, which sells Twinings, Kingsmill, Jordans, Patak’s and Blue Dragon, would be lower than expected in the half on the back of flat sales. “Good” growth for Twinings and Ovaltine was offset by ongoing struggles at lossmaking Allied Bakeries. ABF hopes the proposed merger with Hovis will create a financially sustainable bread business.
ABF also expected adjusted operating losses for its sugar business to be close to £40m. The group took the decision to close the lossmaking Vivergo bioethanol plant last month following protracted negotiations with the UK government. The group said the move, along with restructuring action in Spain, would result in costs and impairments of about £200m, with £50m in cash charges to be incurred in the current financial year.
Weaker profits for the agriculture division were partly offset by stronger gains for ingredients.
AJ Bell investment director Russ Mould said: “The idea that value retailers will automatically thrive in a period where consumers are watching their pennies no longer stacks up. Cheap prices do not mean goods will fly off the shelf, just as Primark has found out.
“Life is never easy as a retailer as there are so many things out of their control – be it the wrong type of weather, economic weakness or taxes. It currently feels like a perfect storm for the retail sector and management must be adept at spinning multiple plates.”
Shore Capital retained it’s ‘buy’ rating on the stock but warned the share price “may tread water for a while until stronger progress emerges”.
Shore Cap analyst Clive Black noted it had been “a most active year for management” thanks to the proposed Hovis merger and restructuring in the sugar business.
“FY25 has had notable bumps in the road,” he added. “A smoother surface should benefit shareholders in FY26 and thereafter.”
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