Key Takeaways
Associated British Foods PLC (LON:ABF) confirmed it will demerge its fast-fashion business Primark by the end of 2027, a long-anticipated strategic pivot that was overshadowed by a sharp drop in first-half profit and a deteriorating outlook for its sugar business. Shares in the conglomerate fell nearly 3 percent on the news as investors focused on the near-term headwinds facing the consumer giant.
"For our food business, the separation will enable greater understanding of the breadth and strength of our differentiated portfolio," George Weston, CEO of ABF, said in a statement. For Primark, he added, it enables "appropriate governance to maximise the future potential offered by Primark’s powerful brand."
The decision follows a strategic review announced last November, with the board concluding that a separation is the best way to maximize long-term shareholder returns. The move will create two independent, UK-listed companies — Primark and a food-focused business retaining the Associated British Foods name — with one-off separation costs estimated at £75 million. However, the strategic clarity was not enough to distract from a difficult first half, where group adjusted operating profit fell 18 percent at constant currency to £691 million on flat revenue of £9.5 billion.
The demerger is intended to provide a clearer investment proposition for two very different businesses. Chairman Michael McLintock stressed the move is "not an exercise in financial engineering," but an effort to provide dedicated boards and shareholder groups for businesses with "very distinct dynamics." The separation is planned as a dividend demerger to be completed before the end of the 2027 calendar year, with both new entities expected to be large enough for inclusion in the FTSE 100 index.
The backdrop for the strategic announcement was a challenging first half. The 18 percent decline in adjusted operating profit was driven by lower profits in Primark, grocery, and particularly the sugar division, which posted a surprise adjusted operating loss of £27 million. The company now expects the sugar segment to be loss-making for the full 2026 fiscal year, a significant reversal from prior expectations, due to European oversupply and aggressive pricing.
At Primark, which accounts for roughly half of group revenue, sales grew 2 percent to £4.7 billion, but this was driven by new store openings. Overall like-for-like sales fell 2.7 percent, reflecting a difficult consumer environment in continental Europe where like-for-likes dropped 5.6 percent. This weakness overshadowed a more resilient UK market, where Primark gained market share with 1.3 percent like-for-like growth. The retailer's operating margin was 10.1 percent, in line with expectations but impacted by higher markdowns to clear inventory.
Analysts noted the conflicting pressures on the company. While the demerger is seen as a logical step, its benefits are long-term. "The long-awaited moment is for now overwhelmed by deteriorating current trading," said Frederick Wild, an equity analyst at Jefferies. Analysts at UBS, who maintained a 'Neutral' rating, trimmed their price target from 2,240p to 2,050p, arguing that investors will remain fixated on the weak like-for-like sales at the discount fashion chain.
This article is for informational purposes only and does not constitute investment advice.
