AB Foods expects reduced Primark margins in 2019-20

By James Davey

LONDON (Reuters) - Associated British Foods <ABF.L> warned on Monday that profit margins at its Primark fashion business will fall in its new financial year as a weaker pound pushes up import costs.

Shares in the group, which generates about half of its revenue and profit from Primark, were down 3.6% at 0836 GMT, paring gains for the year so far to 11%.

AB Foods kept its overall group guidance for the year to Sept. 14 2019, with Primark's margins increasing. However, it forecast they would fall in the 2019-20 year.

"The strengthening of the U.S. dollar during this year and the recent weakening of sterling will increase the cost of goods for next year," it said.

AB Foods' finance chief John Bason pointed out that two thirds of the group's operating profit is earned outside of Britain. That means the group as a whole gets a translation gain from sterling weakening. "But for Primark it's a negative," he told Reuters.

Primark's performance in the current 2018-19 financial year has been solid, leading AB Foods to maintain its overall guidance for the year, which also reflected solid profits at its grocery business that includes brands such as Twinings, Ovaltine and Ryvita.

They offset a decline in the group's sugar operations.

AB Foods, which also owns major agriculture and food ingredients businesses, forecast adjusted earnings per share in line with 2017-18's 134.9 pence.

It said Primark's full-year sales are expected to be 4% ahead of last year, driven by increased selling space, but like-for-like sales are set to fall by 2%.

Primark continues to win market share in Britain, although like-for-like sales are expected to decline 1% in the current financial year in a soft overall market, the group said.

SUGAR OUTLOOK

The outlook for sugar in 2019-20 was more promising.

"We've actually got much better visibility on particularly EU pricing and an improvement in profitability in our European sugar businesses," said Bason.

"There's no doubt that 2018-2019 will be seen as the low water mark for our sugar profitability, with a nice improvement next year."

The group said its businesses had completed all practical preparations for Britain leaving the European Union and contingency plans were in place should it experience disruption at the time of exit.

Shares in AB Foods, which is majority-owned by the family of Chief Executive George Weston, were down 85 pence at 2,268 pence at 0834 GMT, valuing the business at 18 billion pounds.

(Reporting by James Davey, Editing by Paul Sandle/Louise Heavens/Susan Fenton)