Associated British Foods (LSE: ABF) just lowered its Primark growth forecasts, and the share price dropped a few percentage points in early trading. In its 23 January update, the company posted a 0.5% rise in revenue for the 16 weeks to 4 January, at constant currency. At actual currency rates, it fell 2.2%.
Revenue in the period was split 50/50 between the firm’s Primark fashion/lifestyle retail arm and its food-related businesses.
Eyes on Primark
Primark saw a 2% total sales rise in the period. Like-for-like sales, however, fell by 1.9%. Sales were backed by “good growth across our key growth markets, Spain, Portugal, France, Italy, Central and Eastern Europe and the US.” Though like-for-like sales in the UK and Ireland grew over Christmas, the full period saw a decline.
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According to Kantar data, Primark’s market share dipped a little to 6.8%, which still seems healthy.
The update added: “Trading activity within elements of our shopper base was weak as a result of cautious consumer sentiment and a lack of seasonal purchasing catalyst given the mild autumn weather“.
That led the board to downgrade its full-year guidance for Primark, now expecting “low-single digit sales growth in 2025“. Adjusted operating profit margins should remain about the same.
Sentiment
The Associated British Foods share price is down 13% in 12 months, and 27% over five years, which doesn’t surprise me. I’d expect retail stocks like this to follow the general economy, though with ABF I see defensive strength. Doesn’t that mean this could be a good time to consider buying?
Morgan Stanley and Citigroup have both cut their ratings on the stock in the past week. So the share price is down, the company has lowered its full-year guidance, and we have analysts turning bearish. That combination makes me think this could be a stock for contrarian investors to consider. At least, those who look past the short term, as I think the short term could remain sticky.
Valuation
Forecasts suggest an earnings fall this year, for a forward price-to-earnings (P/E) ratio of 10.5. Net debt of over £2bn complicates things a bit. But the City expects it to stay fairly constant. And with its market-cap of £14bn, I just don’t see the company struggling with debt.
If the forecasts are right, earnings should start to climb again from 2026 — hopefully in line with an economic recovery. That means we could see the P/E drop as low as 8.5 by 2027. The economy’s the biggest unknown and I see it as the main threat to the ABF share price.
Brokers expect the dividend to climb 25% between 2024 and 2027, with a current forward yield of 3.3%.
Food (and clothing) for thought
Agriculture, sugar production and the other food businesses really aren’t my kind of things. So I’m unlikely to buy Associated British Foods, even though I think I see good long-term value.
But for investors who like the safety of essentials like food, and also want to get into into cut-price clothing and homewares, ABS is surely one to consider.
Interim results are due on 29 April.
