Penneys owner share price dips over US problems

Shares in Associated British Foods (ABF), parent group of fashion retailer Primark (known here as Penneys), have fallen by 15 per cent since its results last month, after analysts expressed doubts over its much-vaunted US expansion.

Analysts at RBC and Macquarie have criticised Primark’s refusal to embrace online sales, while its competitors in the US all adjust to a structural shift in consumer buying behaviour towards more online shopping.

ABF says its low-margin, low-price operating model doesn't have room to absorb the costs of online shopping, such as shipping fees.

Macquarie, however, says Primark, which is run globally from the Dublin headquarters of Penneys, has left “a strategic flank wide open”. Meanwhile, RBC also expressed concern in a client note last week over Primark’s reliance on high sales volumes at its stores and the lack of a digital strategy.

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“We think its high-volume densities may be becoming a constraint to sales growth, it lacks a transactional online offer and we think it will take a long time for it to reach critical mass in the US, where it lacks brand recognition,” RBC said.

Scale back

The doubts over Primark’s US strategy emerged after ABF announced it is already planning to scale back three of its stores there, just two years after entering the US market amid a publicity fanfare.

Most of its eight US stores are located within shopping malls, as opposed to the bustling high street locations that have served it so well in Ireland, Britain and Europe, where its growth has exploded in recent years.

Primark is responsible for more than 50 per cent of ABF’s group profits. The retailer had sales in the year to September 16th of more than £7 billion, with operating profits up 3 per cent on a constant-currency basis to £735 million.

The increase was further accentuated when foreign earnings were translated back into ABF’s currency of sterling, which is weakening.

John Bason, ABF's chief financial officer, has ruled out home delivery for online shopping, on the basis of cost. But he has said Primark may look at rolling out a click-and-collect service in future.

Meanwhile, Primark this week further beefed up its management team by hiring former top Zara executive, Paula Dumont Lopez, to head up its womenswear department.