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Should you buy downmarket Associated British Foods plc after today’s results, or upmarket Burberry Group plc?

The grocery sector has delivered some post-festive cheer, with Morrisons, Sainsbury’s and Tesco issuing bumper results this week, but a cloud hangs over clothing retailers following Next‘s recent slump. Can the sector avoid a fashion disaster?

On the mark

Primark owner Associated British Foods (LSE: ABF) has just issued a positive trading update for the 16 weeks to 7 January 2017, reporting group revenue from continuing operations up 10% year-on-year at constant currency, amid good growth across all parts of the businesses. Weak sterling delivered an added boost, with sales up 22% at actual exchange rates. Comparable sales at Primark rose 12%, or 23% with that welcome currency tailwind.

Primary’s UK stores performed particularly well, offsetting declines in Germany and the Netherlands, and should further benefit from a strong programme of new store openings. The US business continues to develop, although the strong dollar has hit margins. 

Sugar, sugar

Associated British Foods also runs a sugar business and here the results were even sweeter, with comparable revenues up 22% on a constant currency basis, or 38% at actual exchange rates. It also has several global grocery brands, with Twinings posting stirring sales growth, particularly in the UK, North America and Australia, while Ovaltine performed soothingly in Asia. Allied Bakeries volumes remained strong, although pricing and margins were “challenging”.

The market has been sceptical, despite positive growth across all its business arms, with the stock down 1.7% at time of writing. Perhaps investors see currency tailwinds as a one-off that could reverse. More likely, new investors are deterred by its toppy valuation of 25.4 times earnings, coupled with a disappointing 1.4% yield.

Associated British Foods will 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, but Associated British Foods is hardly a bargain buy. 

Fashion hit

High-end fashion chain Burberry Group (LSE: BRBY) also trades at a luxury valuation of 22.4 times earnings, after posting share price growth of 44% over the last 12 months. Its fightback following five lean years was helped by the post-Brexit collapse in the pound, which made its bags and coats and frocks cheaper for foreign fashionistas.

Trading conditions remain tough, however, as Chinese consumers continue to retrench. Burberry’s 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 in forward revenues.

Fashion miss

Barclays gave Burberry a boost yesterday, claiming that 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 company’s 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 underwhelms at 2.4%. Burberry has worked hard to turn things around but, as with Associated British Foods, I am worried that its growth prospects may now be priced in.

Global potential

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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.