Primark Needs New Year Resolution From Investors

(Bloomberg Opinion) -- New year, new you.

And Associated British Foods Plc's Primark is fully behind the January fitness fad. Strange, then, that investors are staying home on the sofa.

Leggings, lightweight jackets and the like are on offer in colors and designs that wouldn't look out of place in upmarket athleisure specialist Sweaty Betty. But Primark's leggings are cheaper by a long way, coming in at just 8 pounds ($10.30).

It’s little wonder that 2019 has got off to a good start for the value fashion retailer. That follows a relatively decent performance in the 16 weeks to Jan. 5., when U.K. total sales rose 1 percent. Though like-for-like sales fell by 0.8 percent, that is a far sight better than the performances at Next Plc, Marks & Spencer Group Plc and Debenhams Plc. It’s even more compelling given that Primark does not sell online. The shares rose about 6 percent on Thursday.

Primark Needs New Year Resolution From Investors

In line with other U.K. chains, Primark enjoyed a late surge of shoppers that enabled Christmas sales to make up for a poor showing in November, when warm weather and Black Friday suppressed spending. Still, shares in ABF had sold off sharply at the end of last year, falling more than 20 percent between the first week of November and the end of December. They trade on a forward price earnings ratio of about 16 times, which implies Primark’s valuation at about 13 times, according to analysts at RBC Capital Markets.

That's a discount to both Inditex's 19 times and Hennes & Mauritz's AB's 16 times. It looks harsh for several reasons.

Primark’s low prices, and continually improving product ranges, mean it is better placed to serve the more cautious consumer when the broader high street is under strain – something that’s worth planning for, given the never-ending Brexit negotiations and cooling European economies. In the near term it should get a lift from last year’s stronger pound, which cut purchasing costs for items that are currently in the shops. 

And, there is still significant potential from the chain’s expansion into the U.S, where like-for-like sales are positive. It is moving into Florida, and continues to look for new sites.

Investors can't buy Primark stock, so they must hold AB Foods to get exposure to the retailer. The parent's share price doesn't look like it’s reflecting the chain’s potential either, given that its own forward price earnings ratio is at a 33 percent discount to its average over the past five years.

With the high street maelstrom, Primark’s positives aren't getting as much attention as they should. Time for a fresh look for the new year.

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

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

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