Primark Eyes Separation as Parent ABF Reports Mixed Financial Results

Associated British Foods (ABF), the parent company of fast-fashion giant Primark, recently unveiled its financial results for the year ended 13 September, hinting at a potential future separation of Primark into a distinct business entity. While this strategic review is ongoing, the company's full-year performance showed a mixed picture, with ABF group revenue decreasing by 3% to £19.459 billion and pre-tax profit falling 26% to £1.413 billion.

Focusing on Primark, the retail division demonstrated resilience. Sales at constant currency grew by 1% and were in line on a reported basis, reaching £9.5 billion. Adjusted operating profit saw a 2% increase, hitting £1.126 billion, which pushed the adjusted operating profit margin to 11.9% from 11.7% the previous year, underscoring the brand's operational strength.

This growth was significantly propelled by successful store rollouts across Europe and the US, which contributed a healthy 4% to overall sales growth. In the UK, a renewed emphasis on Primark's core value proposition and an enhanced product offering led to improved like-for-like sales in the second half of the year. Conversely, European markets experienced a strong first half followed by a period of weaker trading.

Despite the overall 1% sales increase for Primark, achieved consistently across both halves of the year, like-for-like sales presented a different trend, declining by 2.3% for the full year. This was marked by a 2.5% drop in the first half and a 2% decrease in the second half, partly offset by the impact of new store openings.

In the crucial UK and Ireland market, which constitutes 45% of Primark's total sales, performance was challenging, with overall sales down 1%. While the first half saw a 4% decline, the second half rebounded with a 1% increase, largely benefiting from expanded selling space. On a like-for-like basis, sales in this region fell 3.1% for the year, including a steep 6% drop in the first half which then moderated to a 0.4% decline in the second half.

Despite the sales decline, Primark successfully increased its UK market share to 6.8%. The initial sales slump reflected broader weakness in the UK clothing retail market and reduced shopping activity among certain customer demographics. However, a robust sequential improvement in H2 trading was attributed to a stronger product assortment, particularly in womenswear, coupled with increased digital engagement and more favourable market conditions.

Across the rest of Europe, accounting for 49% of total sales, Primark experienced a 2% rise in overall sales, driven by a 5% increase in the first half, though this was followed by a 1% fall in the second half. Like-for-like sales in Europe declined by 1.5%, moving from a 1.1% increase in H1 to a 3.7% drop in H2. In Spain and Portugal, strong underlying sales growth in H1 continued to outperform a weak market in H2. France and Italy saw flat sales amidst challenging market conditions and intense competition, while growth in Central and Eastern Europe was primarily from new store openings. Northern European markets, notably Germany in H2, experienced slight declines, though strategic restructuring of store footprints in Germany and the Netherlands led to improved sales densities and profitability.

The smaller American market, representing 6% of Primark's total sales, showcased unequivocally positive results. Sales surged by 20% for the year, with a 17% rise in H1 and an even stronger 23% increase in H2. This significant growth was fueled by an aggressive space expansion programme, including the opening of six new stores, marking Primark's entry into Texas and Tennessee. The brand now operates 33 stores in the US, with an additional 18 leases already signed.

ABF attributed Primark's improved adjusted operating profit to the inherent strength of its operating model and a focused approach to cost optimization. Gross margin expansion was noted, benefiting from favourable foreign exchange rates, supplier efficiencies, and effective markdown management, all contributing to enhanced profitability.

Looking ahead, Primark sees "significant white space" for growth in its established European and US markets, alongside new franchise opportunities. The company aims for new store rollouts to contribute approximately 4% to 5% annually to Primark’s total sales growth for the foreseeable future. A significant step in this expansion strategy was the signing of the first franchise agreement with the Alshaya Group, facilitating Primark's entry into the Gulf markets, with initial store openings already in progress.

Regarding the speculation of a separation, ABF confirmed that its board is conducting a review of the group structure to maximize long-term value. While no definitive decision has been made, the outcome could potentially lead to the board deciding to separate the Primark and Food businesses. This review is being undertaken in consultation with ABF's largest shareholder, Wittington Investments, which has expressed commitment to maintaining majority ownership in both potential entities. The board has pledged to provide an update on this review as soon as practically possible, indicating a significant strategic development for the future of Primark.