The grocery sector has delivered some post-festive cheer, with Morrisons, Sainsburys and Tescoissuingbumper results this week, but a cloud hangs over clothing retailers following Nexts recent slump. Can the sectoravoid a fashion disaster?
On the mark
Primark ownerAssociated British Foods (LSE: ABF) has just issueda positive trading update for the 16 weeks to 7 January 2017, reportinggroup revenue from continuing operations up 10% year-on-year at constant currency, amidgood growth across all parts of thebusinesses.Weaksterling delivered an addedboost, with sales up 22% at actual exchange rates. Comparable sales at Primark rose12%, or 23% with that welcome currency tailwind.
Primarys UK stores performed particularly well, offsetting declines inGermany and the Netherlands, and should further benefit from a strong programme of new store openings. TheUS business continues to develop, although the strong dollar has hit margins.
Associated British Foodsalso runs a sugar business and here the results were evensweeter, with comparable revenues up 22% on a constant currency basis, or 38% at actual exchange rates. It also has several global grocery brands, withTwinings posting stirringsales growth, particularly in the UK, North America and Australia, whileOvaltine performed soothinglyin Asia.Allied Bakeries volumes remained strong, althoughpricing and margins werechallenging.
The market has beensceptical, despite positive growth across all its business arms, with the stock down 1.7% at time of writing. Perhaps investors see currency tailwindsas a one-off that could reverse. More likely, new investors are deterred by its toppyvaluation of 25.4 times earnings, coupled with a disappointing 1.4% yield.
Associated British Foodswill have to continue growing at a rapid rate to justify that, although forecast earnings per share (EPS) growth of 12% and 10% over the next two years look promising. Recent share price growth has been patchy, with the stock down 11% over 12 months. Low-cost Primark still swings, butAssociated British Foods is hardlya bargain buy.
High-end fashion chainBurberry Group(LSE: BRBY)also trades at a luxury valuation of 22.4 times earnings, after postingshare price growth of 44% over the last 12 months. Its fightback followingfive lean years was helpedbythe post-Brexit collapse in the pound, which made its bags and coats and frocks cheaper forforeign fashionistas.
Trading conditions remain tough, however, as Chinese consumers continue to retrench. Burberrys last set of results were published in mid-November, and they showed a sharp drop in profits as the company pursues its turnaround plans, amid warnings of a mid-teens percentage drop inforward revenues.
Barclays gave Burberry aboost yesterday, claimingthat it offers good value at a 15% discount to the luxury sector, and praising its strategy to restore density. It also hailed the success of its recent bag launches, as Burberry looks to boost its range of accessories. The companys cost reduction programme should save at least 100m, boosting the bottom line.
Forecast EPS growth of 8%, 7% and 10% over the next three years promising, even if the yield underwhelmsat 2.4%. Burberry hasworked hard to turn things around but, as withAssociated British Foods, I am worried that its growth prospects may nowbe priced in.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.