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. The company's stock fell by 14% following Thursday's announcement, a decline that analysts suggest would have been even steeper had Primark been a standalone entity.
A Continental Reversal for the Primark Machine
The core issue is a dramatic reversal in Primark's performance across key European markets. During the crucial 16-week peak trading period, like-for-like sales in the UK and Ireland grew by a respectable 1.7%. However, this was completely overshadowed by a severe 5.7% decline in continental Europe, excluding the UK and Ireland.
This marks a stark contrast from a year ago, when the UK stores were struggling and European outlets were trading robustly. ABF attributes the UK recovery to sharper marketing, including a "Major Finds" initiative, and the successful introduction of click-and-collect services. These self-help measures, however, are not yet in place to rescue the continental performance.
Uncertain Causes and Competitive Pressures
The reasons behind the European slump remain somewhat unclear. ABF and other retailers point to a weaker consumer environment in major economies like France, Germany, and Italy. Yet, questions are being raised about whether Primark's brand buzz is fading or if fierce competition from ultra-fast fashion online giants like Shein and Temu, as well as established players like Zalando, is finally biting.
As one analyst from Panmure Liberum noted, the worrying sales trends lead to concerns over "whether it is just a reflection of the weak consumer environment or whether the proposition is losing traction" in markets where Primark's penetration is lower.
Corporate Strategy and Future Outlook
The profit warning represents a significant shift in guidance. Just two months prior, ABF was confident of delivering growth in group profits and earnings per share for the financial year ending in September. It now expects a decline, which analysts interpret as a swing from anticipated growth of 4-5% to a similar magnitude of decrease.
Despite the setback, Primark is still projected to make around £1 billion in operating profit this year, with an expected margin of 10%. The situation is described as a "splutter" for the usually reliable retail machine, not a crisis. The event has, however, likely postponed any potential corporate demerger of Primark from ABF's food businesses, with management now likely to avoid such a major distraction for the next year or two.
The warning was compounded by mixed trading in ABF's food divisions, a volatile US retail environment, and a regulatory investigation into its proposed purchase of Hovis. Nevertheless, the sudden weakness in Primark's European heartland was the unequivocal market-moving factor.
