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AB Foods Sees Sales, Profit Gaining as Commodity Costs Ease

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Nov. 8 (Bloomberg) -- Associated British Foods Plc, the owner of the Primark discount-clothing chain and maker of Silver Spoon sugar, said it expects sales and earnings to rise this year as commodity costs ease.

Adjusted earnings per share rose 2 percent to 74 pence ($1.19) in the 52 weeks ended Sept. 17, the London-based company said in a statement today. That beat the 72.3 pence average of 21 analysts’ estimates compiled by Bloomberg.

The company, which also sells Twinings tea products and Kingsmill bread, said it expects earnings growth this year will be weighted to the second half as the benefit of lower commodity prices won’t be immediate because of its forward purchasing. The company will start selling clothes with a cheaper cotton content from the beginning of 2012, Chief Executive Officer George Weston said.

“It’s a beat versus consensus on the EPS level,” Warren Ackerman, an analyst at Societe Generale in London, said today. “The main reason is sugar, which had a very good year. Not surprisingly they’re flagging subdued economic growth in developed markets.”

Sales at the company’s Primark stores open more than a year rose 3 percent, in line with the company’s forecast. Adjusted operating margin, a measure of profitability, slid to 10.2 percent from 12.5 percent at the unit as raw material costs and the U.K.’s value-added tax increased. The company gets the about a third of its operating profit from the division.

Consumer Pressure

“We expect continued pressure on consumer disposable incomes,” CEO Weston said in the statement.

AB Foods, which controls Illovo Sugar Ltd., the largest maker of the commodity in Africa, said adjusted operating profit of the sugar unit rose 31 percent as it sold more beet sugar in China and as prices of the commodity traded near a 30-year high. The shares rose 1.4 percent to 1,128 pence at the close of London trading.

The company, which is opening new Primark stores in London’s Oxford Street shopping area and in Edinburgh and Berlin, expects to increase the amount of store space by about 10 percent this year, Weston said today in a telephone interview.

“The stores we opened this year have a heavier weighting of big important locations,” he said. Sales in the run-up to Christmas have been good, he commented, saying that “the reality of families having less money is with us for some time yet, but there’s a chance that if the terrible weather of last year doesn’t reoccur, we’ll have a following wind” during the festive season.

Cautious Outlook

“The reported results were slightly better than expectations, which should please investors, but guidance was slightly more cautious than we had expected,” analysts at Sanford C. Bernstein including Andrew Wood wrote today in a note.

The company reported net debt of 1.29 billion pounds and capital investment of 825 million pounds in the year. Cash flow from operating activities fell to 736 million pounds from 1.17 billion pounds.

“We would highlight the fact the net debt and capex was higher than we expected,” Societe Generale’s Ackerman said. “One area of focus will be how much cash they generate.”

To contact the reporter on this story: Clementine Fletcher in London cfletcher5@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

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