A sudden downturn in Primark’s European sales has cast a shadow over parent company Associated British Foods (ABF), leading to a 14% drop in the conglomerate’s share price after a profit warning. While the UK operations of the fast-fashion retailer have rebounded, the continental European stores have experienced a significant decline, raising questions about the brand’s proposition and the consumer environment across the continent.
The 16-week peak trading period saw like-for-like sales in the UK rise by 1.7%, while the rest of Europe (excluding the UK and Ireland) suffered a 5.7% drop – a substantial decline. ABF has attributed the improved UK performance to sharper marketing and the introduction of click-and-collect services, but it remains uncertain whether these self-help measures will work as quickly in Europe.
Analysts suggest that lower penetration levels across many European markets, as well as a weaker consumer environment in large economies like France, Germany, and Italy, may be contributing to Primark’s struggles on the continent. There are also concerns that the brand’s buzz may have faded or that competition from online retailers like Shein, Temu, and Zalando is finally taking a toll.
Despite the challenges, Primark is still expected to generate £1 billion in operating profit this year, and ABF’s lowered forecast for operating profit margin, taking into account extra markdowns due to lower continental turnover, still stands at 10%. However, the difference from previous expectations is significant, with analysts estimating the change from a 4-5% growth in group profits and earnings per share to a similar-sized decline.
The mixed trading on the food front, a regulatory investigation into the proposed purchase of Hovis, and a volatile US retail environment have also contributed to the overall market unease. But it is the continental news on Primark that has clearly been the main driver behind the share price drop, as the once-purring retail machine has developed a concerning stutter.
The question now is whether this setback will impact ABF’s long-term thinking on a potential corporate separation, which has been a topic of discussion. While the billionaire Weston family, the majority owner, would retain the same status in both businesses if a split were to occur, it may be prudent to avoid distractions for a year or two, as demergers tend to work best when there is obvious value to unlock.
