Since Penneys’ owner Associated British Foods (ABF) announced it was considering spinning its clothing business out as a separate unit in a “strategic review”, things have been going downhill.
The timing of the announcement last November always seemed suspect. Penneys, known as Primark outside of Ireland, has been the linchpin for ABF over many years but it was run into challenges more recently.
Sales in the Irish and UK markets, which account for about 45 per cent of total revenue, have come under pressure as consumers tighten their purse strings and competition at the bargain end of the retail sector intensifies. Temu and Shein are eating into market share and even Vinted, the second-hand platform, has become a challenger.
Last week, in a Christmas trading statement that was moved forward by close to three weeks from its scheduled date, the group had more bad news.
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Weak sales at Primark, especially in its continental Europe division, which accounts for 49 per cent of sales, mean that adjusted operating profit and adjusted earnings per share are now expected to come in below last year’s figures, instead of above as previously forecast.
Ireland did not escape the gloom. Like-for-like sales in Europe over the 16 weeks to January 3rd fell 5.7 per cent. UK sales were up 1.7 per cent, but once Irish sales were factored in, UK and Irish like-for-like sales were ahead by a more modest 1.1 per cent. Clearly, Ireland is feeling the hurt.
So are the company’s shares. Having dropped close to 5 per cent in early November, the shares quickly gave up another 5 per cent as markets had time to consider the spin-off plan.
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They had been trading at about that level since then, but on the trading update profit warning, the shares promptly slipped a further 14 per cent.
Davy is now cutting its forecast for adjusted earnings per share by 11 per cent for this year and 6 per cent for next. It cited “ongoing margin pressure at Primark, as its growth model continues to generate limited traction” as one of the key factors in that revision.
Accepting that the group’s current valuation is “depressed”, it is not hugely confident about any improvement in the short term. “We see limited near-term catalysts for recovery, with earnings momentum likely to remain challenged as growth pressures appear increasingly structural rather than cyclical,” it said.
The Weston family, which controls the group, is understood to feel the clothing brand’s recent rapid growth makes hiving it off into a separate listed entity an obvious next step. Other investors are likely to argue that reviving Primark’s fortunes is a more urgent priority.
