AB Foods' Primark ongoing lull dismays analysts

Associated British Foods (ABF) shares plunged over 11% following a year-end update that disappointed analysts due to a weak Primark performance, overshadowing anticipated losses in its sugar division. Primark's second-half sales grew a mere 1% with like-for-like sales down 2% and EBIT margins declining by approximately 80 basis points, largely driven by European weakness. This outcome unnerved investors, with analysts reiterating 'sell' ratings and indicating that a re-rating is unlikely until Primark achieves sustainable positive like-for-like sales growth.

Analysis

Associated British Foods (LSE:ABF) experienced a significant sell-off, with shares falling over 11% to their lowest point since April, following a year-end trading update that failed to meet analyst expectations. The primary source of disappointment was the performance of its key Primark division, which analysts view as the main driver of investor sentiment and valuation. Primark reported a mere 1% sales growth in the second half, undermined by a 2% decline in like-for-like (LFL) sales driven by persistent weakness in European markets. This sluggish top-line was compounded by an approximate 80-basis-point contraction in EBIT margin, which occurred despite gross margin improvements. While the company's sugar division recorded an expected £40 million loss and £200 million in one-offs, this was already priced in by the market. Analyst consensus indicates that investors are unnerved by the negative LFL trajectory and a lack of forward guidance, with Deutsche Bank reiterating a 'sell' rating and stating that a re-rating of the stock is unlikely until Primark can deliver sustainable positive LFL growth.

Key Decisions for Investors

• Investors should closely monitor future trading statements for a reversal in Primark's negative like-for-like sales trend, as this is the key catalyst required for a positive re-rating of the stock.
• Given the sharp 11% share price decline, it is crucial to evaluate whether the current valuation fully reflects the headwinds at Primark, as sustained underperformance and a lack of guidance could justify further downside.
• A cautious approach is warranted due to the lack of forward guidance from management, which introduces significant uncertainty and will likely lead to downward revisions of FY25 earnings forecasts from analysts.