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With the possible exception of the Weston family owners, Associated British Foods (LSE:ABF) probably isn’t anyone’s top FTSE 100 stock. But I’ve been taking a closer look, and I think there’s still a lot to like.
The stock fell over 10% in a day on Thursday (10 September) after the firm released its Q4 results. They were mixed, but the really interesting bit – in my view – was elsewhere.
The results
The results weren’t pretty. The sugar division continues to disappoint with widening expected losses, but the thing investors really care about is value fashion/lifestyle retailer Primark.
The retailer giant’s revenues grew, but only because of the opening of new stores. Like-for-like sales fell 2.6% across the year, and that’s what the market reacted to:
| Region | % of Primark sales | FY26 like-for-like |
|---|---|---|
| UK & Ireland | 45% | +0.4% |
| Continental Europe | 47% | -4.3% |
| US | 6% | +11% |
Management put the European performance down to weak consumer confidence, and the UK to a prolonged hot summer. Both are these are classic retail challenges – and represent ongoing risks.
The overlooked detail is that Kantar data shows Primark gaining share in a UK market that contracted. That’s a real demonstration of a business that’s more resilient than its rivals.
But I’m not in the least surprised that the stock went down. Investors are looking for signs of long-term growth, not just a business that’s going backwards slower than its rivals.
The more interesting news
ABF announced earlier this year that it plans to demerge Primark in December 2027. And I’m at least tentatively interested in the spun-out business.
It’s impossible to be decisive without knowing how much debt goes with it. But it justifies the focus on the retailer, rather than the wider conglomerate.
The genuinely new thing for the brand is online retail and home delivery. That’s a big change of tactic for a business that has conspicuously resisted this for decades – and it looks risky to me.
Primark offers customers bargains, which means its own costs have to stay low. And not trading online has helped with this enormously in the past in a couple of big ways. One is that it requires additional real estate and this brings costs. But the company has just bought a warehouse in Sheffield for £90m to launch the operation.
That however, isn’t the biggest issue. There’s a reason nobody outside Next has really made online fashion work in the UK, and it is returns. Return rates in the UK are around 24% and reverse logistics cost £10-£25 a parcel. Do that maths on a £12 pair of jeans with a 10% profit margin and it stops working very quickly.
Next has spent decades building returns infrastructure from an early catalogue business, while Primark ‘s starting from near-scratch (it does offer a Click & Collect store operation). And that makes me wary.
Final thoughts
I think Primark’s a legitimately good business, and I’m interested to see what it looks like standing alone. The shift to online concerns me, but I’m prepared to bet it’s been carefully thought through.
With a demerger coming next year however, I’ve got time to wait and see what happens for a bit. I’ve got more obvious stocks to buy right now, so this one stays on the watchlist.
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Stephen Wright does not own shares in any of the companies mentioned.
This story originally appeared on Motley Fool
