Despite the impressive headline figures showing strong revenue growth, what really matters to investors is guidance for the future. On this front, there is enough cautious news to drive Associated British Foods’ share price down.
Management is worried about the impact of high inflation and higher interest rates on the consumer and so it is guiding for slower growth at Primark. It also says margins aren’t going to improve near-term, which will disappoint many people.
Even though freight and energy costs are easing, it expects to incur higher staff costs and extra investment in technology. Buying stock from abroad is also more costly due to unfavourable foreign exchange rates.
AJ Bell’s Russ Mould said: “While these are short-term issues to stomach, ABF continues to have its eye on the longer-term prize and that includes a much bigger presence for Primark in the US. Despite existing competition in the country from the likes of Forever 21 and Old Navy, ABF clearly believes there is room in the market for its low-cost retail model to expand. Its latest target is the southern part of the country.
“UK stores have slowly been fine-tuned with a better shopping experience helped by a broader range of clothes, more health and beauty products, a select number of cafes and premium-priced essentials for women.
“It has also helped that the high street is back in fashion after the pandemic, with consumers having clearly missed the in-store shopping experience during lockdown and are fed up waiting for parcels to arrive in the post from online orders.
“Primark is cognisant that ignoring the online channel completely is dangerous and so it has been testing click and collect services. That is obviously going well given the pilot is to be extended across more stores.”