Is Primark set for a downturn?

IT HAS carved a profitable niche on the High Street with its budget chain Primark, but Associated British Foods could be set for a spell of bad luck.

Analysts at Barclays have downgraded the stock over concerns about Primark’s push into America, and disappointing forecasts for the group’s sugar business.

ABF is one of the few conglomerates left standing and owns brands as diverse as Ovaltine, Ryvita and Kingsmill bread.

But Primark and British Sugar have always been its key businesses.

Florence Dohan at Barclays downgraded the firm to equal weight saying ‘success in the US market is not a given’ for Primark.

In September it opened its first America shop at the former home of department store chain Filene’s in Boston, and earmarked a further seven new stores for cities across the country as well as a ninth store in New Jersey.

Dohan warns the business faces three threats in the US.

Firstly Primark is not known in America and has chosen not to advertise its openings outside social media and a PR campaign focused on the fashion industry.

‘This is consistent with Primark’s approach not to resort to more expensive advertising campaigns but to rely on word of mouth,’ she says. ‘However, this has resulted in more muted openings than the typical widely expected European stores openings.’

Secondly Americans like sales and Primark prefers to sell its products at permanently low prices all year round.

She said: ‘This might result in Primark changing its business model.’

Thirdly Americans buy fewer items per square foot than in Europe, something called sales density, with prices typically lower.

‘There is structurally lower sales density in the US market,’ she said. ‘As such average selling price per unit of apparel on the US market was $16.3 in 2014 vs. $29.7 in Western Europe.’

When rival H&M launched in the US it made a bigger splash. In the first half of 2000, within 10 months of its US opening, sales per store in the America were four times higher than those in Sweden beating expectations. It ramped up its expansion plan rolling out 21 stores within 22 months.

In terms of the sugar business EU quotas will be removed in October which should mean lower costs and improving selling prices.

While this should mean the business will be more stable it will never bounce back to previous levels. Dohan says: ‘We do not expect sugar to become the substantial profit centre it used to be. ABF’s sugar business accounted for 32pc of group operating profit in 2013. Since then, the division’s contribution to group operating profit has fallen to 10pc last year, driven by lower world and EU sugar prices.’

She forecasts it will contribute 11pc of group operating profit in 2017.

Despite the gloom the shares nudged up 51p to 3341p.

The top risers on the Footsie leader board were the miners boosted by improved metals prices. They, along with strong American jobs data, helped the index close 1.1pc or 68.97 points higher at 6199.43 points.

Antofagasta rose 39.5p to 550.5p, Anglo American was up 59p to 592p, while Glencore climbed 17p at 160p. Nik Stanojevic, an analyst at Brewin Dolphin, said: ‘ Many [mining] investors have been underweight for some time and given the huge under performance in 2015, are now bringing positions closer to being in line, perhaps helped by the weak US dollar in early February.’

In terms of the jobs data UK investors took comfort that there was no shocks in the US jobs figures. The US Labour Department said employers added a 242,000 workers in February boosted by the retailers, restaurants and health care providers.

Elsewhere shares in Monitise rose 0.68p or 31pc to 2.85p after the mobile payments firm said it was in talks to sell a division called Markco Media. This contains its MyVoucherCodes.co.uk and Last Second Tickets businesses. Other gainers were budget airline EasyJet, which rose 4.5pc or 67p to 1552p on the back of passenger numbers which rose 9.8pc in February.

Cineworld was the biggest faller, down 33.80p or 6.35pc to 498.20p, after analysts at UBS reiterated its shares as a sell closely followed by Schroders, down 4.2pc, after Citi downgraded it to neutral from buy over concerns about challenging markets.

Travis Perkins was also down, 3.57pc or 66p to 1783p, after Deutsche cut their price targets for the stock. Other big fallers were ywo housebuilders Berkeley Group down 70p at 3010p and Barratt Developments down 9.5p at 554.5p. ÷ SHARES in Actual Experience, the AIM listed data firm, rose nearly 6pc or 15p to 277.5p on the back of announcing a fiveyear agreement with Vodafone. Actual Experience will crunch data to ensure the mobile phone giant’s apps and services used on handsets are working to their optimum. The group has developed software that gathers measurements from customers which it analyses to improve services.