Primark owner Associated British Foods (LON:ABF) updated the market today and investors were not so impressed. AB Food is a rarity in that it has one foot in the grocery business and one in retail; however, it is the retail side that grabbed trader’s attention on Monday and for the wrong reasons.
Primark makes up for around 60% of AB Foods profits. It’s no revelation when we acknowledge that the retail sector is a challenging sector right now, but Primark had been a rare gem in that it continued to pick up market share despite tough trading conditions. As a result, AB Foods share price was up over 10% across the year, outperforming peers in its sector.
However, today Primark showed that it has its own set of problems as it warned that profit margins at Primark will fall in the new financial year, as the weaker pound and stronger dollar lift import costs. The firm said it will maintain it guidance for this year, which reflects in part solid profits from its grocery business. However, the firm forecasts that margins would fall next year.
Despite the headwinds highlighted in the results, there are still reasons to be bullish this stock:
1) AB Foods is a very diverse business type and with a diverse geographical footprint which enables it to balance out the volatility.
2) Primark’s discounted offering is appealing in a period of economic uncertainty, low wages and growing concerns of a slowdown.
Negatives to watch:
1) Discounted, high product turnover clothing stores are under increasing environmental scrutiny. This could negatively impact AB Foods going forwards.
2) Currency headwinds are expected to reduce Primark margins next year.
AB Foods levels to watch:
The share price is down close to 3% on the day after breaking through support at 2300. Strong support can be seen at 2250. A breakthrough this level could open the doors to 2000, its low at the turn of the year. On the upside a break through 2400 could negate the bearish trend which has been in play since May.