Associated British Foods (AB Foods) confirmed that underlying sales at its Primark clothing business fell 2.7% during the Christmas quarter. This clarification followed an earlier profit warning on January 8, which had already communicated sales estimates. The weaker-than-expected Primark sales, alongside subdued demand for cooking oils and bakery ingredients in the United States, were identified as key factors behind the profit warning issued by AB Foods.
Primark experienced a particularly challenging holiday season, with like-for-like sales in continental Europe declining by 5.7% in the 16 weeks to January 3. In contrast, Primark's comparable sales in the UK saw a modest increase of 1.7%. This mixed performance in its retail division, coupled with a varied showing in its food business, led AB Foods to anticipate lower than expected profit for the fiscal year.
The profit warning and sales figures emerged as AB Foods progressed with its plan to spin off Primark from its food businesses. On April 21, AB Foods announced its intention for Primark to have a separate London listing with its own board, aiming to unlock value by allowing financial markets to better understand and value both the food businesses (including brands like Ovaltine, Ryvita, and Twinings, as well as sugar, ingredients, and agriculture units) and Primark independently. The demerger is anticipated to be completed by the end of 2027.
Despite shareholder backing for the separation, including from the Weston family's holding company which owns nearly 60% of AB Foods' equity, the company posted an 18% fall in first-half core profit. AB Foods also revised its full-year profit forecast downward, attributing this to concerns over consumer spending due to the Iran war, weak US cooking oil and bakery ingredient markets, and a more cautious sugar outlook. AB Foods shares dropped 3% on the announcement, extending a 16.5% decline over the past year and bringing its market value to approximately £13 billion. Analysts from RBC estimated Primark's standalone value at just over £7 billion, noting it could trade at a price-to-earnings multiple of around 10 times due to recent negative like-for-like sales and limited digital offerings outside Britain.
The separation is expected to result in two FTSE 100 companies, with AB Foods CEO George Weston remaining at the helm of AB Foods and Eoin Tonge leading Primark. The demerger is projected to incur dis-synergies of less than £45 million and one-off transaction costs of about £75 million.
