Primark Profits Slip 11% Ahead of ABF Demerger Deadline

Primark's operating profit fell 11% to just above £1bn in the last financial year, ten months before its parent Associated British Foods plans to split the discount fashion chain into a stand-alone FTSE 100 company by the end of next year.

The demerger logic, as ABF's results statement frames it, is compelling. Primark already generates two-thirds of group profit, and the mix of Ovaltine, Twinings, sugar refining and discount fashion has always sat awkwardly together. One paragraph covers a yeast plant in India; the next jumps to Primark's "digital flywheel" or the "By Coleen" collection. Separating into two FTSE 100 companies with stand-alone governance makes sense on any reading.

But the split won't uncover hidden value, because Primark isn't hidden — and it isn't currently in sparkling form either.

Why are continental sales falling?

Like-for-like sales in continental Europe dropped 4.7% for the financial year, a jarring number even against what ABF calls "weak" consumer sentiment. Market conditions in Germany, Italy and Spain were all described as "very challenging".

ABF's explanation is that the continental operation runs a year or so behind the refresh already administered in UK stores: sharper digital marketing, rejigged ranges, and the introduction of click & collect. The trouble is the company gave the same explanation in January, when the gap between home and continental performance first became apparent. Ten months later, the story remains largely unchanged.

The UK and Ireland are in positive territory, with like-for-like sales up 0.5%, but the continent is still miles off. Britain is now the priority for a home delivery service aimed at capturing "incremental" shoppers, so the gap could stay wide for some time. Online-only operators such as Shein, Temu and Zalando may simply pose a bigger headache on the continent.

None of this alters the underlying strength of the Primark machine. Despite a U-turn on the economics of home delivery, stores are still opening, including in the US, and the chain turns over almost £10bn a year.

What does the demerger change for investors?

Potential profit growth is the metric would-be new investors in newly liberated companies tend to scrutinise. On that measure, Primark is working hard to go roughly sideways. For the current year, the forecast is a same-again operating margin of 10%-ish.

The deal structure rules out hype. No new money will be raised in next year's demerger, so timing is irrelevant in one sense. Shareholders will get what they already own, just in two parts, with no real need for investment banking fanfare.

The wider group faces its own drag. ABF, as currently constituted, is forecasting a second consecutive year of lower earnings because the food ingredients side, especially sugar, remains sticky. The £1.9bn of share buybacks over the past four years have ended as the group shifts into long-term investment mode.

There could be another 12 months until the big split, which allows time for things to perk up. But in current "macroeconomic headwinds" conditions, ABF is travelling slowly to the historic separation. It's still the right thing to do — just don't expect fireworks.