23 January 2025
If you are covering the latest financial results from Associated British Foods, please find below a comment from Chris Beckett, head of equity research at Quilter Cheviot:
"Associated British Foods (ABF), the owner of Primark, issued a disappointing trading update this morning. Weak sales from Primark in the UK have led to a reduction in full year guidance. Coming after September’s sugar related profit warning for the current year, the stock is likely to remain on a valuation discount to peers.
"Like-for-like sales for Primark in the UK and Ireland were down 6%, highlighting a significant challenge in what is now a mature and relatively static market for the brand. The limited store expansion in the region reflects this maturity, and total sales are suffering as a result. While Primark remains a strong concept globally, with good growth in Europe and the US, the UK business has struggled to resonate with consumers in the way it once did. Amid rising cost pressures on households and after the budget, UK consumers appear to be under significant financial strain. Yet rivals like M&S and Next have managed to maintain relatively stable clothing sales, leaving Primark’s UK performance looking weaker by comparison, with some evidence of loss of market share.
"Primark’s revised guidance reflects these challenges, with expectations for sales growth now trimmed from mid-single-digit to low-single-digit percentages. The group also anticipates negative like-for-like sales in the UK for the coming year, though it hopes to hold operating margins flat – a positive sign given the current environment. This margin stability is noteworthy in the context of rising costs, particularly the impact of higher National Insurance contributions and minimum wage increases, which have hit all retailers.
"Outside of Primark, ABF’s other divisions are largely stable, with the exception of its sugar business, which has been a weak point for some time. The conglomerate structure offers some resilience, but the overarching narrative remains one of underperformance in key areas, particularly the UK retail market. For investors, the stock has derated somewhat, offering a yield of 3.7% this year. However, even with a discount relative to peers like Next (on 14x earnings) and M&S (on 11x), the valuation does not look compelling when factoring in the conglomerate structure and the challenges Primark is facing in its home market.
"The stock opened down around 1%, reflecting the fact that many of these negatives were already known. While the international growth story for Primark remains intact, the disappointment in its core UK market and the limited upside relative to peers make this a less attractive proposition for now."
