Associated British Foods’ plan to separate Primark from its food businesses by the end of next year would split the group into two companies with independent governance. The case for separating discount fashion from a portfolio that includes food ingredients and sugar is clear, although the move is not expected to uncover a large amount of hidden value.
Primark already generates around two-thirds of ABF’s profits, but its performance has weakened. For the financial year, like-for-like sales fell 4.7% in continental Europe, while they rose 0.5% in the UK and Ireland. ABF said markets including Germany, Italy and Spain remained very challenging.
The company has pointed to store and range updates, digital marketing and click-and-collect as ways to improve its continental business. However, the explanation has changed little since January, when the gap between UK and continental sales became apparent. Primark is also prioritising a home-delivery service in Britain to attract additional customers.
The retailer remains a large operation, with annual turnover close to £10bn, and continues to open stores, including in the US. But operating profit was only just above £1bn for the year, down 11% from the previous year. ABF expects Primark’s profit margin to remain around 10% this year.
The demerger will not raise new funds: shareholders will receive stakes in the two separated businesses. In the meantime, ABF expects earnings to fall for a second consecutive year, with pressure from its food ingredients operations, particularly sugar. The group has also ended £1.9bn in share buy-backs carried out over the past four years as it shifts towards long-term investment.
Sources: The Guardian Business.