AB Foods reviewing separation of Primark

The overall full-year performance was disappointing as Associated British Foods (LSE:ABF) had forewarned, but the headline news is a strategic review which could lead to the separation of the Primark and Food businesses.

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The rationale for such a move is that management consider that the Food business has long been misunderstood by the market, despite its portfolio, expertise and potential. In addition, Primark is reaching a size where it perhaps requires laser focus to capitalise on its own growth prospects, particularly overseas where the brand is gaining some real traction.

The consideration of the split is understandable, with Primark being a jewel in the crown for the group and currently responsible for 49% of group revenues. That being said, this has been a challenging time for the retail business and the numbers are mixed.

Revenues of £9.5 billion in the 52 weeks ended 13 September 2025 were up by just 1% on the corresponding period and adjusted operating profit by 2% to £1.1 billion, both in line with expectations. Operating profit margin ticked higher to 11.9% from 11.7%, ahead of estimates but the outlook is perhaps less favourable given a particularly unpredictable time for the consumer at present, due largely to the harmful effects of the previous Budget on the retail sector and a potentially damaging one to come.

Quite aside from that backdrop, the sector itself is famously competitive, and Primark now lines up against the likes of Chinese players such as Shein and Temu, while its online offering is still far behind that of Next. Nonetheless, AB Foods is estimating that the continued rollout of stores will further boost sales growth, and the group opened 23 new stores in the second half of the year at home and abroad. This is set to expand further into the Middle East with the opening of one store in Kuwait last month and a further three in Dubai early next year.

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Meanwhile, and although the US business is still in its fledgling stage, accounting for 5% of group revenues, the potential for growth is evident as the company focuses on investment and marketing to lift brand awareness in what could be a major opportunity. Sales continued to accelerate at a brisk pace, with a rise of 20%, with the group now having 33 stores in place and another 18 in the pipeline as the group continues to build on its growing momentum in what is a huge addressable market.

Overall for Primark, favourable weather and popularity in the womenswear range made for a better second half, while the online presence is also receiving attention from the group. The Click & Collect service is now available at all 187 of its British stores, and the stock checker facility is seeing significant growth. While the online offering is far from the finished product as seen at many of its competitors, it is part of a two-pronged approach whereby physical stores remain a top priority for the group.

For the group as a whole, the Sugar business remains a thorn in the side. As expected, the unit posted an annual operating loss of £40 million versus previous estimates of a profit of up to £75 million. Lower European sugar and higher beet prices, along with a loss at its UK bioethanol business, Vivergo were the culprits and the decision to close the Vivergo plant and restructure its Spanish sugar business have resulted in impairment charges of around £200 million. The performance weighed on the headline group numbers, with revenues dipping by 3% to £19.46 billion, adjusted operating profit by 13% to £1.73 billion and pre-tax profit by 26% to £1.41 billion, with the profits marginally ahead of estimates.

On the shareholder return front, a further £250 million buyback was announced and the previous year’s dividend was maintained, leading to a yield of 2.8% which had temporarily been boosted to 4% by the payment of a special dividend.

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The outlook is certainly muddied by the distraction of the strategic review, with the group already fighting fires on several fronts. In the meantime, the share price has dipped to a 0.1% decline over the last year, as compared to a gain of 18.5% for the wider FTSE100, despite a bounce of 11% over the last six months. While the shares have recovered by some 65% since their multi-year low in October 2022, the price still significantly trails previous highs.

A muted share price reaction to the announcement will likely lead to the market consensus remaining at a hold for the time being, as investors assess the potential for a release of some pent-up value to both the Food and the Primark businesses should the split proceed.