AB Foods First-Half Profit Gains 26% on Primark Strength

Associated British Foods Plc, the U.K. owner of Twinings tea and Ovaltine malt drink, reported first-half profit gained 26 percent, beating some analyst expectations, driven by the budget-fashion chain Primark.

The stock surged as much as 6.1 percent to its highest intraday price ever after AB Foods said pretax profit rose to 415 million pounds ($633 million) in the six months ended March 2. The dividend was raised 10 percent to 9.35 pence a share, the London-based company said in a statement.

Primark, which sells 1-pound electric-pink sunglasses, benefited from store investments and openings, as well as European customers seeking cheaper items amid the region’s debt crisis. Same-store sales growth of 7 percent outstripped rivals such as U.K. department-store chain Debenhams Plc, which said last week that snowy weather led it to offer more markdowns. The weather has been “pretty fair” and the retailer hasn’t had to discount more since the first half, AB Foods Chief Executive Officer George Weston said by phone.

“The retailer’s success is a refreshing change from the rest of the retail world,” Dan Coen, director at advisory and restructuring at Zolfo Cooper Ltd., said by e-mail. “At a time where the cold weather has put a strain on the high street, Primark is going from strength to strength bringing in cash-strapped customers looking for discounts.”

AB Foods was trading 5.1 percent higher at 1,945 pence as of 12:51 p.m. in London trading, extending the stock’s gain this year to 24 percent.

Cotton Erosion

“The numbers are pretty sparkling,” said Warren Ackerman, an analyst at Societe Generale in London. “It’s time for a breather after a stellar outperformance,” said the analyst, who has a hold recommendation on the stock. AB Foods faces “some near-term headwinds” in the sugar and Primark divisions.

Growth may slow as the weakening of the pound against the dollar erodes the benefit of lower cotton prices, while profit at the sugar division will suffer from lower European production and lower China prices, the company said.

AB Foods said in December that profit would be weighted toward the first half and today said it continues to operate in “low-growth” markets. Primark’s operating margin widened by 2.4 percentage points, helped by lower cotton prices, a weaker U.S. dollar and fewer markdowns.

“The outstanding like-for-like growth at Primark was already known, as was the pace of new openings, but margin growth was much better than expected,” Andrew Wood, an analyst at Bernstein Research said in a note.

Spanish Stores

Same-store sales growth in Spain was “held back in the short term” by the addition of new stores, AB Foods said. Primark increased its total there by 16 outlets to 41 in the last 18 months.

“We’ve seen some cannibalization but it doesn’t worry us,” Weston said. Sales in that market are now “pretty flat.”

The sugar division’s revenue climbed 10 percent. The company said European Commission discussions on sugar quotas are expected in the late summer. While the European Union doesn’t produce enough sugar for its own use, rights to import extra sugar have been sold at a lower price than last year, the CEO said.

The George Weston Foods business in Australia, which includes Top Top bread and Don KRC meat, is “feeling much better” thanks to 6 percent increase in bread prices, though the unit is still unprofitable, Weston said.

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