Associated British Foods (ABF) has slashed profit expectations for its Primark chain after a sharp sales decline in continental Europe forced the budget retailer to cut prices dramatically to clear unwanted stock. The warning sent ABF shares plunging nearly 12%, wiping £1.8 billion off the company's market value.
The unscheduled update reveals a stark reversal for Primark, which saw like-for-like sales drop 5.7% across mainland Europe in the 16 weeks to January 3. The decline hit particularly hard in France, Germany and Italy, where the retailer had previously performed well.
The company said it "[...] significantly increased markdowns to manage inventory levels effectively, which impacted profitability." If current trends continue, Primark's operating profit margin will fall to around 10% for the full year, down from previous expectations.
UK holds steady as Europe falters
Primark's performance split sharply by geography. UK sales grew around 1.7% during the period, despite what the company described as a "difficult clothing market, particularly over Christmas." The improvement marks a turnaround from a 2% decline in the six months to mid-September.
George Weston, ABF chief executive, acknowledged the mixed picture: "Primark has had a challenging start to the financial year, with a mixed performance. In the UK, focused actions and investments to strengthen our customer proposition have driven improved trading and market share gains, while trading has remained weak in continental Europe."
The company has rolled out click-and-collect services across all UK stores and plans to expand the service to European locations, though the necessary infrastructure is not yet in place.
Competition and consumer weakness
Dan Coatsworth, head of markets at investment platform AJ Bell, noted the challenging environment facing Primark. "Many people are loath to spend a lot of money. [...] Opting for cheaper clothes is a natural decision in this environment, and Primark is the go-to name on the high street for lower priced wares," he said. The fragile jobs market makes consumers naturally choose budget options.
A Panmure Liberum analyst raised concerns about whether Primark's struggles reflect only market conditions or deeper issues: "The worsening like-for-like trends in Europe lead to concerns about whether it is just a reflection of the weak consumer environment or whether the proposition is losing traction."
Competition from online retailers including Shein, Temu and Zalando has intensified pressure on Primark's traditional store-based model.
Food arm adds to pressure
ABF's food businesses also struggled during the period, with ongoing consumer weakness affecting cooking oils and bakery ingredients in the US. The company now expects both its Grocery and Ingredients segments to deliver operating profit moderately below last year.
Coatsworth summed up the predicament: "It puts parent company Associated British Foods in a difficult situation. Normally it would have other parts of its group to pick up the slack, but the food arm hasn't been doing that well. That's led to a nasty profit warning for the group."
ABF said it has "[...] a broad range of initiatives in place and planned for the coming months, which we expect to drive improved sales and profitability, particularly in Europe." The company is also considering a separate listing for Primark within the next two years, though majority shareholder Wittington has committed to maintaining majority ownership of both businesses.
Note: This article was created with Artificial Intelligence (AI).
