Business Irish

Saturday 20 July 2019

Penneys continues to make pretty profit on High Street


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John Lynch

I've often wondered what the perennially 'broke' James Joyce would have made of the fact the same premises he picked as a location for the only business venture he was ever associated with in his beloved Dublin would later become the source and inspiration of an international fashion group.

Money always impressed him, even though he had little of it, but he wasn't to know when he chose the premises at 45 Mary Street to locate the city's first cinema, the Volta, that this would essentially be the same building where Primark would make its assault on the fashion world.

Primark (or Penneys as it is known in this country) was the brainchild of the brilliant retailer Arthur Ryan, implemented by his associate Breege O'Donoghue and funded by the Weston family. A hundred years after Joyce launched (and quickly closed) the Volta, it is the retailer of choice for millennials on at least two continents who want 'style' at an affordable price.

The Canadian Weston family was more interested in food than in fashion when they first focused on this part of the world and this is still a major part of their flagship company, Associated British Foods (ABF). Its food manufacturing portfolio is currently generating revenues of £3.4bn (€3.85bn) and its brand names include Twinings tea, Ryvita Crisp bread and Ovaltine. The company also has ingredients (revenue £1.5bn/€1.7bn), agricultural and a problematic sugar businesses. It employs 132,000 people and is valued by the stock market at £17bn (€19.2bn).

Its sugar arm, AB Sugar, is in trouble with profits falling 50pc to £123m (€139m). The company has a significant presence in Spain, South Africa and the UK. AB Sugar produces half the UK's sugar quota and processes all of the sugar beet grown in the UK.

Last year it had significant price pressures brought on by the global oversupply since the ending of the EU production and export restrictions. While the group is frantically cutting costs, the future outlook for this business isn't great.

However, these days much interest at ABF centres on Primark, where almost 60pc of the group's operating profit is earned and which employs 75,000. Founded in Dublin almost 50 years ago, the business model has stood the test of time.

Following the acquisition of some BHS and Littlewoods stores in 1973, Ryan introduced the value/fashion business to the UK. Today, Primark claims it is the UK's biggest retailer by volume, if not by value. The financial crash a decade ago boosted Primark's value/fashion offering.

It entered Europe in 2006 in Madrid and now has 45 stores. The group has expanded into Holland, Germany, Belgium, France, Italy and Austria. Three years ago it entered the US market where today it has nine stores and plans new ones in Florida and New Jersey. Some analysts are of the opinion the future for Primark is in the US. However, this market is extremely competitive and at the present time the company lacks scale.

In spite of its sugar problem, ABF sales last year were an impressive £15.6bn (€17.7bn), when one considers at the beginning of this century they were £4bn. The group saw net profits of £1bn (€1.1bn) and a 6pc increase in earnings per share to 135p (€1.53). Shares trade just above its five-year low at £22 (€24.92).

ABF anticipates stable earnings in the coming year as store expansion of its retail operation is expected to offset the weakness of its sugar business.

However, some analysts still worry Primark could fall victim to changing consumer tastes and lack of internet presence. There is also a view Primark should be hived off from ABF.

The present share price could be a buying opportunity but in this volatile market and with Brexit, it might be best to wait.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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