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Primark Owner ABF Blames Markdowns for Lower Margins

Primark ABF

Associated British Foods (ABF) on Tuesday cautioned that currency pressures could impact the company’s bottom line next year.

The owner of discount fashion retailer Primark, which also has grocery, agriculture and ingredients businesses, reported a 1 percent dip in overall revenue to 12.8 billion pounds ($18.5 billion) for the year ended September 12, while adjusted pre-tax profit slipped 6 percent to 1.03 billion pounds ($1.58 billion).

ABF cited a reduction in food commodity prices as the primary reason for the decline but also noted the impact of more markdowns in Primark stores, which caused the group’s operating margin to fall from 13.4 percent to 12.6 percent and return on capital employed to drop from 33.2 percent to 31.1 percent for the year.

Meanwhile, profit before tax tripped 30 percent to 717 million pounds ($1.1 billion) following losses on the sale and closure of businesses and exceptional items.

“While marginally down, our earnings per share result underlines the group’s strength,” said George Weston, chief executive of ABF, noting, “We delivered a strong operational performance despite the challenges of food commodity deflation and big movements in exchange rates. The group continues to generate strong cash flows and to reduce net debt.”

Sales at Primark, which expanded its retail space by 9 percent in 2015 with 20 new stores and nearly one million square feet (including its first U.S. location in Boston), were up 13 percent on a constant currency basis compared to the previous year.

“We also increased the scale of Primark’s distribution infrastructure to support this growth by extending existing warehouse capacity and opening new facilities in the Czech Republic and the U.S.,” Weston said, noting that ABF spent 306 million pounds ($470.5 million) on the acquisition of new stores, the fit-out of new and existing locations and increased warehouse capabilities.

Despite unseasonably warm weather last fall and a cool spring, which led to a higher level of markdowns, like-for-like sales increased 1 percent and “very high sales densities” were achieved by stores opened in the last 18 months, particularly in France.

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“Spain, Portugal and Ireland all performed very well throughout the year and the U.K. delivered a positive like-for-like performance,” Weston said, noting that the success in these markets was somewhat offset by the opening of new stores in the Netherlands and Germany. “As new stores opened, sales in existing stores declined as customers chose to shop more locally rather than traveling the long distances that we saw in the early days of trading in these countries.”

The strong U.S. dollar also had an impact on margin.

“Primark sources much of its merchandise in U.S. dollars and its strength, particularly against the euro, will have a further adverse effect on margins in the new financial year, especially in the first half,” Weston added. “However, more than half of the potential impact has been successfully mitigated by our buying teams as they have placed orders for next year.”

As of September 12, Primark had 293 stores totaling 11.2 million square feet of selling space. Moving into the next fiscal year, some 1.5 million square feet will be added to the chain’s roster, primarily in North America, the U.K., Spain and France.

Seven stores are planned for the U.S., the majority of which will be open later next year, while locations are on the way in the French cities of Lyon, Nice and Toulon. It will also open its first Italian store at a shopping center in Milan early next summer.