American expansion holds key for Primark

THURSDAY saw Associated British Foods update investors on recent trading.

Revenue rose 2 per cent over the first three quarters of its financial year, or 3 per cent once you strip out exchange rate movements. Primark, the group’s ever-expanding bargain clothing chain, was the driving force behind the rise.

Despite Primark’s strong showing, headwinds related to EU sugar prices saw the shares fall 4.2 per cent on the day of the release.

Sugar production used to be heavily regulated by the EU, with producers set strict quotas.

In 2017, that quota regime ended, giving producers the freedom to churn out as much sugar as they liked. You might think that would be good news for ABF’s sugar division. Not so.

The quotas limited supply, keeping prices high. The ability to produce more has taken the handbrake off European sugar supply, and a glut of sugar has hit the market. Prices have been decimated, and ABF expects to report seriously lower profits as a result.

Investors could do without the headwind, but Primark remains the main story at ABF. It’s already responsible for over half of group profits, and with expansion in the pipeline, that proportion only looks like rising. While the opening of new stores in France and Germany has been delayed, on the whole it was good news on the retail front.

The group is also confident profit margins will jump in the second half. Favourable exchange rate movements are contributing, but it’s encouraging to see tighter stock management playing a role, too.

Looking ahead, much will depend on the ambitious American expansion. If Primark can grab a slice of the huge US apparel market, volatile sugar prices will be a distant memory. Potential success across the pond explains why Primark shares trade on a premium rating to many UK-focused rivals.

The successful European expansion means ABF’s got a pretty good track record as far as conquering new markets is concerned. Only time will tell if it can replicate that in the States.

“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”