From Brooklyn Down to Florida, Primark Hearts America

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(Bloomberg Gadfly) -- It's four years since Primark announced its plans to go stateside. Its ninth U.S. store will open next month in Brooklyn.

That might seem like slow progress. What's more, parent Associated British Foods Plc said a few months ago that it was downsizing some of its stores, not a good sign.

But buried in ABF's interim results on Tuesday was an indication that its U.S. plans are firmly on track.

Primark will open a store in Florida in late 2019. Though it will be supplied by the chain's New Jersey depot, this is still a geographic departure from its existing concentration of outlets in the northeastern U.S.

But it’s a signal that ABF is serious, and committed to cracking America. It wouldn't be expanding to another region if it was about to pull the plug on its operations there.

As I've argued, Primark looks set to break the mold of British retailers failing in their American adventures. It has a good chance of developing a meaningful and successful business in the U.S.

It couldn't have chosen a better time for its expansion into the world's largest economy: there is a surfeit of space available as retailers close stores. Landlords will be willing to offer ABF good deals to get footfall-driver Primark into malls.

Its products are also different to what's currently available in the U.S. -- it'll be the only one offering H&M fashion at K-Mart prices.

Primark hasn't found the going easy -- American consumers' tastes are subtlety different to those of their European counterparts, particularly when it comes to fashion.

But adjusting store sizes, and now the new location, are signs that it is willing to persevere.

Investors don't seem to have much faith that the U.S strategy will pay off. Shares in ABF have fallen about 20 percent since early November.

Primark has an implied enterprise value to forward Ebitda multiple of 9.3 times, according to analysts at Barclays. Inditex, the owner of Zara, is on 12.3 times, according to Bloomberg data. Primark's discount looks harsh given the scale of the U.S. opportunity, and the potential elsewhere.

Indeed, there is scope for ABF to widen margins in its European retail business thanks to sterling's gains against the dollar, and the prospect that the squeeze on U.K. consumers' spending power will end -- official data on Tuesday indicates real wage growth may be about to return.

If Primark does succeed in the U.S., but the valuation of ABF is held back by a volatile performance in other divisions, such as sugar, then there could be pressure for a split of the retail and food arms.

Elliott Advisors' intervention at Whitbread Plc underlines just how attuned activist investors are to potential market mis-pricing.

That's a long way off for now. And if Primark does manage to build a successful business in the U.S., it will be a nice problem to have.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2018 Bloomberg L.P.

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