July 11 (Bloomberg) -- U.K. companies Burberry Group Plc and Associated British Foods Plc are bracing for the pound to dent earnings as Business Secretary Vince Cable says there’s a limit to companies’ ability to absorb a stronger currency.
AB Foods said yesterday that sterling’s strength will reduce full-year profits by 50 million pounds ($86 million), while Burberry warned of a 55 million pounds shortfall in its annual retail and wholesale profits.
The pound has strengthened 11 percent in the past year, prompting Cable to say business is “concerned” and the issue shouldn’t be ignored. Britain posted its widest trade deficit in four months in May as Kevin Daly, an economist at Goldman Sachs, warned this week that the pound’s rise meant U.K. growth could “moderate to some extent as the year goes through.”
The finance directors of AB Foods and Burberry said their underlying businesses were performing well even as sterling would affect earnings.
“I don’t think the strength of sterling from an operational perspective will hold ABF back but in terms of expectation of our profits reported in sterling, that is one of the things we have to manage,” John Bason, finance director at AB Foods which owns the Primark discount fashion chain, said by phone yesterday.
Burberry, which had warned in May of a shortfall of 40 million pounds in its retail and wholesale profit, had a similar message.
“This FX impact hurts the reported number but it’s the underlying business that remains very strong and we’re focusing on our key strategies there to make sure we drive our underlying growth,” Burberry CFO Carol Fairweather said.
The pound has gained 11 percent in the past year against a basket of currencies -- the best performer among 10 major currencies -- as investors bet buoyant economic growth will make the Bank of England the first major central bank to end stimulus measures.
“This year’s appreciation of sterling may prove to be a short term issue,” Cable said in a speech yesterday. “But business is concerned and I believe we should not simply ignore what is happening in the balance of payments.”
As companies prepare to report earnings, firms like British American Tobacco Plc will also see an impact from strong sterling, according to Chris Wickham, an analyst at Oriel Securities in London. London-based BAT, Europe’s largest tobacco company, gets almost all its sales and profits from outside the U.K. and reports in sterling. A spokeswoman for the company declined to comment.
“Sterling is going up because the U.K. economy is getting stronger so this is essentially a good news story,” said Rob Wood, a former Bank of England official who now works at Berenberg Bank in London. “Yes, appreciation will hurt margins to what it was relative to a year ago but sterling is still at a very competitive level, about 15 percent below the pre-crisis peaks.”
While companies may still be able to meet targets they set themselves that aren’t affected by foreign exchange, earnings will be affected, said Andrew D. Wood, an analyst at Sanford C. Bernstein in Singapore who covers companies such as AB Foods, Unilever and Reckitt Benckiser Group Plc.
“Most companies have targets such as organic growth and margins which are not impacted by foreign exchange,” he said. “But earnings per share clearly is, and this will be a brake to stock momentum over time.”
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