Unseasonable weather has taken its toll on full-year sales at budget fashion chain Primark, while the Brexit vote will have both positive and negative repercussions for owner Associated British Foods (ABF).
The group said that like-for-like sales at the Primark division are expected to fall by 2 per cent over the year as warm pre-Christmas weather and a “very cold” March and April dampened its performance.
However, the chain still expects overall annual sales to be 9 per cent ahead of last year, underpinned by an average increase in selling space of 9 per cent. During the financial year, it will have added some 1.2 million square feet of selling space, bringing the total estate to 315 stores and 12.3 million sq ft.
ABF said that the slide in sterling against the dollar since June’s EU vote will have “no effect” on Primark this year because of the firm’s practice of taking out forward currency contracts. However, it warned that its margins will be squeezed as a result of a weaker pound.
“The transactional impact on Primark’s margins from the weakening of sterling against the US dollar, particularly since the EU referendum, will have no effect in this financial year as a result of our practice of taking out forward currency contracts when garment purchase orders are placed.
“However, at current exchange rates, margin will be adversely affected in the new financial year,” it said in a trading update.
The company added that, as a result of the weaker pound, there would be a favourable effect on profit margins at its sugar operations and on profits earned outside the UK.
George Salmon, equity analyst at Hargreaves Lansdown, said: “Reaction to this morning’s update serves as a timely reminder of how important the Primark division is to ABF. “Despite conditions in the group’s other divisions improving, the shares fell by over 4 per cent as the market focused on the declining like-for-like sales at Primark and the likelihood of lower margins next year.”
He added: “ABF is one of the more highly rated UK clothing retailers, with high hopes for its plans to expand into the US following the successful roll-out into Europe.
“In the longer term, success here is critical; a Primark that trades well in the US will have vast growth potential, but if the brand fails to gain traction in the notoriously competitive US apparel sector, then a lot of hopes will have been dashed.”
Analysts at brokerage Shore Capital, which has a “hold” recommendation on the shares, said they expected to leave their forecasts “broadly unchanged” following the update, and were looking for earnings before interest and tax of about £1.1 billion.