Primark record can't save AB Foods

Perhaps investors in Associated British Foods have grown a little blasé after several years of market-beating growth from the fashion chain Primark.

But instead of the usual "Primark bounce" that follows the release of its trading figures, shares in the FTSE 100 Index company continued their recent retreat today as AB Foods dropped another 3% to levels last seen in April.

This is despite more evidence that Primark's cut-price fashion offer continues to hit home with British shoppers, with a record trading performance in the week before Christmas. The company also reported further progress with its ambitions to build a sizeable business in the United States.

As well as jitters over the retail outlook, investors have been unable to overlook renewed signs of trading pressure at AB Foods' sugar business.

Revenues from continuing operations were 12% behind last year at constant currency, leading to a likely profit reduction greater than previously forecast in the financial year to September. This is primarily due to significantly lower EU sugar prices, which adversely affected its UK and Spanish businesses.

It marks a short-lived recovery for the sugar division, which reported a substantial rise in annual profits in November. However, trading conditions have weakened following the ending of EU sugar quotas and as a result of exceptionally high beet yields and increased crop areas.

Elsewhere in the AB Foods conglomerate, the company reported good recent sales growth for its Twinings and Ovaltine brands, as well as stronger volumes at its Kingsmill and Allinson bakeries business.

Overall, the group said its outlook remains unchanged, with progress expected in adjusted operating profit and adjusted earnings for the full year.

Shares have been under pressure in recent weeks as some analysts have questioned the outlook for sales growth in Primark's existing stores estate amid current tough trading conditions.

Last month, for example, analysts at RBC Capital Markets cut their price target on AB Foods from £35 to £31 and lowered earnings forecasts for Primark by 3%.

They expressed concern at Primark's lack of a transactional online offer and the time it will take to reach critical mass in the US, where it lacks brand recognition.

Even so, AB Foods said Primark revenues were still 7% ahead of a year earlier in the 16 weeks to January 6. This reflected a "strong" like-for-like sales performance in the UK and continued store expansion. By earlier this month, it had 350 stores trading from 14.2 million sq ft, compared with 13.1 million sq ft a year ago.

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