AB Foods Gains Most in 14 Years as Primark Plans U.S. EntryGabi Thesing
Primark, the U.K. budget clothing chain owned by Associated British Foods Plc, plans to open its first stores in the U.S. from next year, providing a new avenue for growth at a business that has doubled sales in five years.
The outlets will be located in the northeast of the country, with the first due to open in Boston toward the end of next year, London-based AB Foods said today in a statement, sending its shares up the most in more than 14 years.
Primark’s U.S. entry is “a wow moment,” Andrew Wood, an analyst at Sanford C. Bernstein, said in a note. Founded in Dublin as Penneys in 1969, the seller of 8-pound ($13.44) Simpsons T-shirts and 12-pound denim dresses has expanded rapidly since first venturing away from home with the opening of a shop in Madrid in 2006. It now has stores in nine markets across Europe with annual sales exceeding 4 billion pounds.
“The U.S. clearly provides an important additional route for sustained growth from new store openings at Primark, whose success in moving into Europe has been clear,” Wood wrote. Still, the expansion “will likely not move the needle in terms of results for another three to four years.”
AB Foods shares rose as much as 9.9 percent in London trading, the biggest gain since March 2000. They were up 8.7 percent at 2,960 pence as of 1:03 p.m.
Primark is crucial to AB Foods, accounting for more than 40 percent of profit at a time when sugar earnings are slumping.
Discount fashions such as 8-pound skirts and 6-pound tops have helped the retailer gain favor with shoppers from Berlin to Madrid and presented a challenge to competitors such as Marks & Spencer Group Plc and Hennes & Mauritz AB.
Primark’s potential “just got considerably bigger,” according to Charles Mills, an analyst at Credit Suisse.
The first U.S. outlet will be located on a 70,000 square feet (6,503 square meters) site previously occupied by Boston’s Filene’s department store. Primark is negotiating to open further stores in the region through to the middle of 2016.
The chain, which has no online offering, follows European competitors including H&M, Tesco Plc, Inditex SA and Topshop in taking fashion stores to the U.S. Tesco said this month that its F&F clothing brand will open outlets in the northeast of the country later this year.
U.S. clothing retailers are also expanding beyond their domestic markets as fashion becomes an increasingly global business. J. Crew Group Inc. opened its first European flagship store in London last year and Los Angeles-based Forever 21 Inc. has opened stores from Berlin to Beijing.
Primark plans to add “a handful of stores” between Washington and Maine, AB Foods Chief Executive Officer George Weston said today in a telephone interview.
Cultural links between Boston and Ireland make the northeast of the country an ideal testing ground, he said. The Primark brand is well known to Boston’s large Irish population, “and it’s much easier and quicker to get from Dublin to Boston than it is from Dublin to Vienna,” the CEO said.
“Primark will do well in the same cities that Topshop, H&M and Inditex have opened in as there is obviously an appetite for young fashion -- and of course Primark’s prices will make it even more attractive as it has done in Europe,” said Maureen Hinton, director of global retail at researcher Conlumino.
U.K. retailers haven’t always succeeded in the U.S. Tesco exited the country’s grocery market last year after a failed six-year foray, while Marks & Spencer sold Brooks Brothers in 2001 for less than a third of the price it initially paid.
“The American apparel market is highly competitive and very fragmented so it will be interesting to watch what Primark does,” said Bernstein analyst Jamie Merriman.
Primark plans to increase its selling space by 13 percent this financial year and the chain’s profit will be “well ahead” of last year’s, Finance Director John Bason said.
That will help offset declines at AB Foods’ sugar business. Operating profit at the division tumbled to 64 million pounds in the first half of the year, from 162 million pounds a year earlier, while sales dropped 22 percent as the unit grapples with accelerating imports from outside the European Union.
While world sugar prices are “unsustainably low,” they “will rise in time,” Weston said.
Earnings per share for the year will be at “similar” levels to 2013, Bason said, reiterating a Feb. 24 forecast.