A sharper than expected drop in sugar prices dragged on sales at Associated British Foods’ sugar division lower, taking the shine off the record UK festive sales at the group's budget fashion chain Primark.
Shares in ABF slipped by 86p, or 3pc, to £27.77 in midday trading as analysts called the blue-chip conglomerate’s festive update a “mixed bag”.
Although the overall outlook for the group remains unchanged, profits at ABF’s British Sugar division are now expected to fall this year due significantly lower EU sugar prices. The business has been affected since the EU abolished the sugar quota in September, the first time the cap on sugar production has been scrapped since 1968. A bumper harvest of sugar beet in Europe following good weather over the summer has also reduced demand and weighed on pricing.
John Bason, finance chief, said that the business would face a 20pc slump in sugar prices during the financial year. As a result of the pricing pressures, ABF reported that sugar revenues were 12pc lower during the 16 weeks to January 6, compared to last year.
“There’s no getting away from signs that ABF’s sugar comedown will be a protracted one,” commented Ken Odeluga at City Index. “Management is not ready to countenance radical action that would offload the weight from the sugar business on the group’s shares.”
Elsewhere ABF toasted the strength of Primark, which enjoyed a bumper Christmas at a time when its high street rivals have suffered from falling sales and are pleading for rent reductions from landlords.
The low-cost chain, which is the UK’s biggest clothing retailer by volume, recorded a 9pc rise in total sales as shoppers hunted for cheaper options.
Mr Bason said that despite others suffering from retail gloom, Primark’s UK business was “on fire”. He revealed that discount retailer was growing market share and luring more shoppers into its store, despite a slowdown in fashion sales and high street footfall.
“We are acutely aware that UK families are watching their budgets very closely and when the sterling slump took place we did not put our prices up like many of our rivals,” said the finance chief. Primark has been cushioned from the weaker pound by its revenues outside the UK, which provided a currency hedge.
“If we have the product that people want to buy at the right price, people will come”, Mr Bason added.
Primark’s recent range of Harry Potter inspired clothes, such as Hogwarts themed pyjamas and homewares, had also driven sales. In contrast to strong UK performance, Primark’s sales across continental Europe were held back due to unseasonably warm weather which dampened demand for winter clothes.
"Primark looks to have outperformed the wider UK retail sector over the key Christmas period," commented George Salmon at Hargreaves Lansdown. "Impressive for a business that has no exposure to the main driver of growth in the sector, online sales," he added.
Mr Bason reiterated that Primark had no plans to launch a transactional website and the brand's presence on social media was doing enough to inform customers about their range and lure shoppers into stores.