AB Foods Seeks to Ease Currency Concern as Primark Expands

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Associated British Foods Plc sought to ease concern over the impact of the stronger dollar on its Primark clothing shops, saying it shouldn’t prove too burdensome next year.

Primark’s buying teams have been able to mitigate “a good proportion” of the negative impact on the next financial year, AB Foods said in a statement Thursday. The budget chain’s sales rose 9 percent in the first 40 weeks of its year, or 13 percent excluding currency shifts, the company said.

“The rhetoric around Primark’s margin prospects is rather more bullish than was previously the case,” Exane analyst Jeff Stent said in a note to clients, adding that analysts may raise their estimates slightly.

The strengthening of the dollar against the euro has proved a thorn in the company’s side this year, weighing on profit at its sugar and fashion businesses. AB Foods reiterated that exchange rates will probably reduce full-year earnings by about 25 million pounds ($39 million). It also confirmed earlier guidance that adjusted earnings per share will decline modestly in the current financial year.

The stock traded 3.6 percent higher at 3,037 pence at 9:34 a.m. in London, where the company is based.

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AB Foods has come to rely on Primark for growth as record global sugar supplies have led to a slump in profitability at that business. The retailer’s expansion is continuing with as many as three new stores in Italy, the European Union’s second-biggest clothing market, the first of which will be in Milan in early summer 2016.

Primark plans to “get a feel for the market,” Chief Financial Officer John Bason said in a phone interview. “The research we’ve done indicates the Primark concept should resonate with Italian consumers.”

In Italy, large store space can be “quite tricky to find,” said Charles Allen, an analyst at Bloomberg Intelligence. “It will be interesting to see how easy it is for them to grow.”

Some of Primark’s recent store openings have held back comparable sales growth recently. New stores in the Netherlands and Germany diverted customers away from the fashion chain’s existing stores, which meant same-store sales remained flat over the last 16 weeks. Without the new stores, same-store sales would have grown by between 2 percent and 3 percent across the chain, CFO Bason said.

AB Foods said preparation for the opening of its first Primark store in the U.S. at a site in Boston this September is “well-advanced” and the company is continuing to make significant investment in warehouse infrastructure.

Regarding its Illovo sugar business, AB Foods said while European prices have shown some signs of recovery, global prices have continued to be weak and it’s unable to predict when they will improve. The company expects a decline in the unit’s operating profit for the full year.

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