On Thursday, Citi analysts downgraded Associated British Foods (LON:ABF:LN) (OTC: OTC:ASBFY) stock rating from Neutral to Sell, adjusting the price target significantly from £24.00 to £17.70. The change reflects a more cautious stance towards the company's future earnings and sales outlook, especially concerning its Primark brand.
The downgrade is based on expectations that Associated British Foods will face challenges in both its fashion retail segment, Primark, and its UK food businesses. Citi analysts project a decline in Primark's sales, estimating a 4% to 7% decrease compared to consensus figures. This outlook is influenced by the growing competition from online discounters and resale platforms, which are perceived to be encroaching on Primark's value proposition.
The analysts also anticipate a slowdown in Primark's physical store expansion and like-for-like sales (LFLs). They suggest that the brand's market position may be jeopardized by the shift in consumer behavior towards online shopping, coupled with data indicating a significant audience overlap with online discounters.
Furthermore, Citi's proprietary analysis predicts a negative impact on Primark's gross margin. They forecast a 170 basis points (bps) decrease by the fiscal year 2026 due to the strength of the US dollar. This anticipated drag on profits adds another layer of concern for the retailer's performance.
For Associated British Foods' UK food businesses, which account for one-third of the total food segment, the analysts foresee risks related to growth and pricing power. This is in light of the expected acceleration of UK food inflation in 2025, which could put additional pressure on the company's earnings.
The downgraded earnings per share (EPS) estimates for fiscal years 2025 and 2026 stand at 4% and 15% below the Visible Alpha consensus, respectively. The analysts' negative outlook on the company's sales and margin trajectory, combined with broader market challenges, underpins the decision to lower the stock rating and price target for Associated British Foods.
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