Associated British Foods PLC (LON:ABF) forecast profits at its Primark clothing chain will be squeezed in the first half of its current year while the coronavirus outbreak in China slowed down production in its other divisions.
In a trading update for the 24 weeks ending 29 February, the FTSE 100 group said operating profit for Primark was expected to be “marginally down” on the prior year despite a 4.2% increase in sales amid a decline in margins.
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ABF also said Primark sourced “a broad assortment” of its products from China but it had managed to stock up ahead of the outbreak and the company did “not expect any short-term impact”.
However, ABF warned that the risk of supply shortages could increase later in the year if its Chinese factories remained closed for prolonged periods and was currently assessing several options including a step up in production.
The company added that factories in its other divisions including AB Mauri, AB Agri and Ovaltine were operating at a reduced capacity due to labour and logistics constraints caused by the epidemic.
Overall, ABF said it expected sales growth and its adjusted operating profit to be ahead of last year with “strong growth” expected in the second half of the back of Primark profits and a recovery in its AB Sugar division.
As a result, the firm said its outlook was “unchanged” for the full year.
The group is also planning further expansion of its Primark store estate with 500,000 square feet of new selling space planned in the next quarter in locations such as Manchester, New Jersey, Berlin and Warsaw.
In a note on Monday, analysts at Liberum retained their ‘buy’ rating and 3,070p price target on ABF, saying despite the margin issues and macro challenges it remained one of their “top, high quality growth picks offering exposure to strong secular growth trends over the long-term”.
Tight margins make Chinese supply risk “potentially serious” for Primark, says analyst
AJ Bell’s Russ Mould said that ABF’s highlighting of tighter margins at Primark made the risk from a disruption to its Chinese supply chain “a potentially serious one” as the clothing chain will require volumes to be maintained to avoid further slippage.
He added that the coronavirus could also affect retail footfall in Primark’s stores, which it relies on heavily sue to its lack of an online delivery operation.
ABF shares were 1.6% lower at 2,541p in late afternoon trading on Monday.
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