Shares in Associated British Foods (ABF) tumbled sharply after the conglomerate issued a surprise profit warning, with its star retail brand Primark at the heart of the downturn.
A Continental Reversal for Primark
The warning, delivered on Thursday, sent ABF's share price down by 14%. Analysts suggest that if Primark were a standalone company, the market reaction might have been even more severe. The core issue is a dramatic reversal in fortunes across Primark's European stores. During the critical 16-week trading period, like-for-like sales in the UK and Ireland rose by a respectable 1.7%. In stark contrast, sales across the rest of Europe – excluding the UK and Ireland – fell by a significant 5.7%.
This marks a complete flip from the situation a year ago, when continental Europe was trading well and the UK market was soft. ABF attributes the UK recovery to sharper marketing, including a "Major Finds" initiative, and the successful introduction of click-and-collect services. However, these remedies are not yet in place to solve the continental problem.
Explaining the European Slump
The company acknowledges that the consumer environment in key markets like France, Germany, and Italy is weaker than in the UK. However, questions are being raised about whether Primark's brand appeal is fading or if intense competition from online giants like Shein, Temu, and Zalando is finally biting. Panmure Liberum analysts highlighted concerns over whether the weak sales are purely down to the economic climate or if "the proposition is losing traction" in markets where Primark's penetration is lower.
Primark currently lacks the infrastructure to roll out click-and-collect in Europe, though it plans to do so in the medium term. For now, the group is resorting to extra markdowns to clear stock, which has pressured profitability.
Broader Implications and Corporate Strategy
Despite the setback, Primark is still expected to generate around £1 billion in operating profit this financial year, with a forecast operating profit margin of approximately 10%. The situation is described as a "splutter" for the usually reliable retail machine, not a crisis, and the long-term expansion story remains intact.
Nevertheless, the shift in outlook is substantial. Just two months ago, ABF was confident of delivering growth in group profits and earnings per share for the year ending in September. It now expects a decline. Analysts estimate this represents a swing from expected growth of 4-5% to a similar magnitude of decline.
This volatility has practical implications for corporate strategy. There has long been speculation about splitting Primark from ABF's food and ingredients businesses to unlock value. However, the current uncertainty makes such a demerger a potential distraction. As Nils Pratley notes, demergers work best when there is obvious value to unlock, and for now, it might be prudent for AB Foods to avoid major structural changes for a year or two while it stabilises Primark's European operations.
The profit warning was also influenced by "mixed" trading in ABF's food divisions and a volatile US retail environment. The Competition and Markets Authority's investigation into ABF's proposed purchase of Hovis added to the cautious mood.
