Shares in Associated British Foods (AB Foods) took a significant hit this week, falling by 14% following an unexpected profit warning. The downturn was primarily driven by a sudden and severe slump in sales at its star retail brand, Primark, across continental Europe.
A Continental Reversal of Fortune
The warning highlights a dramatic reversal in Primark's performance. Just a year ago, its stores on the continent were trading robustly while the UK business experienced a soft patch. The situation has now flipped. During the critical 16-week peak trading period, like-for-like sales in the UK and Ireland rose by a healthy 1.7%. In stark contrast, sales across the rest of Europe plunged by 5.7%, a substantial decline that caught the market off guard.
AB Foods pointed to successful initiatives in the UK, such as sharper marketing under its "Major Finds" campaign and the introduction of click-and-collect services, for the domestic recovery. However, these remedies are not immediately transferable to Europe. The infrastructure for click-and-collect is not yet in place there, and the group faces deeper challenges.
Underlying Concerns and Competitive Pressure
Analysts are questioning whether the weak sales are purely a reflection of a tougher economic climate for consumers in major markets like France, Germany, and Italy, or if more fundamental issues are at play. Panmure Liberum analysts noted concerns about whether "the proposition is losing traction" in European markets where Primark's brand penetration is lower.
The sudden dip also raises questions about the brand's enduring appeal and whether fierce competition from ultra-fast-fashion online giants like Shein and Temu, as well as established players like Zalando, is finally making a dent in Primark's historically resilient model.
Corporate Strategy and Future Outlook
The profit warning led AB Foods to revise its full-year forecast. Just two months ago, the conglomerate was confident of delivering growth in group profits and earnings per share for the financial year ending in September. It now expects profits to be down, with analysts estimating a swing from anticipated growth of 4-5% to a decline of a similar magnitude.
This development has implications for long-term corporate strategy. There has been periodic speculation about splitting the fast-growing Primark from AB Foods' more stable food and ingredients businesses. The current volatility, however, suggests such a demerger would be "a distraction best avoided for a year or two," as the focus must remain on stabilising the European retail operation.
Despite the setback, the situation is far from a crisis. Analysts still expect Primark to generate around £1 billion in operating profit this year, with a projected margin of 10%. The long-term expansion story for the value retailer remains intact, but the events of this week serve as a stark reminder that even the most purring retail machines can develop a worrying splutter when continental conditions turn sour.
