Associated British Foods Plc warned profit will decline in the next fiscal year as rising energy costs and the strengthening of the dollar weigh on the Primark value fashion chain.

The UK conglomerate said Primark, which generates most of the group’s profit, is experiencing unprecedented volatility and its operating margin will fall next year, despite recent price increases. The stock fell as much as 8.6 percent in London, approaching the lowest level in a decade.

Retailers are in a bind as expenses are increasing, yet consumers are facing tighter budgets. Soaring energy costs are putting pressure on the group while a stronger dollar is particularly impacting Primark, which buys most of its clothing in US dollars. AB Foods reports its earnings in sterling, which is near the lowest level since 1985.

The company has a “retail business that is experiencing the volatility and cost increases the likes of which I’ve not seen before,” John Bason, the outgoing finance director at AB Foods said in an interview, adding that the group’s energy costs are very “volatile and very high.”

In a sign of the pressure that Primark’s customers are under, the group said it won’t raise prices further given that consumers will probably have less disposable income next year. It said it will work to remove costs from the business.

Hard-Hit

Primark was hard-hit during Covid lockdowns as stores closed for months on end and it lacks an e-commerce site to fall back on. The retailer is cutting hundreds of jobs but, even with rising prices, it still hasn’t been enough to offset the supply chain disruption and inflation the company is facing.

Sales are recovering since stores reopened in the UK, but elsewhere in Europe customer visits have failed to recover amid ongoing Covid restrictions and that has held business back. The UK has yet to fully recover to pre-pandemic levels, with like-for-like sales in the final quarter of the current year expected to be 9 percent lower than the comparable pre-Covid level. In Europe, final quarter like-for-like sales will be even lower, down 18 percent on levels achieved before the novel coronavirus swept the globe.

The company is pressing ahead with a click-and-collect trial on children’s products in the UK later this year, building on an update to its website in April allowing customers to check stock availability, while still not transacting online.

The latest update from AB Foods paints a picture of a “deteriorating European consumer,” said James Grzinic, an analyst at Jefferies. Still, the company should be more resilient than most peers as consumers seek bargains, he added.

Dimmer Outlook

The dimmer outlook for Primark comes at a time when many retailers are struggling to cope with rising energy and labor costs, which threaten to push some smaller brands out of business. Next Plc, a household clothing and homewares retailer, warned that worsening inflation could hit consumer sentiment even as it raised its profit forecast last month.

Earlier this year, AB Foods chief executive officer George Weston warned that the worst inflation in four decades meant its costs were rising very significantly and would impact the business. The company said Thursday that supply chain difficulties added more than £200 million ($230 million) to Primark’s expenses and overall disruption and inflation led to an increase of £750 million in working capital. Sales and profit in the current year are still on track though.

Analysts at Credit Suisse lowered their forecast for Primark margins to 7.2 percent for the next financial year from 9.7 percent this year.

“The key risks are trading at Primark given the number of current headwinds and the customer response to an unprecedented level of apparel inflation over the next two years,” the analysts wrote Thursday.

By Thomas Mulier and Katie Linsell

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Primark to Raise Prices as Cost Pressures Mount

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