Investing.com -- Associated British Foods (LON:ABF) (ABF), the parent company of retail giant Primark, has lowered its sales growth outlook for 2025, citing persistent challenges in the UK retail market, on Thursday.
The company now expects low single-digit growth for Primark, a revision driven by a 4% drop in UK sales during the 16 weeks leading up to January 4, 2025.
Like-for-like sales in the region fell by 6.4%, reflecting weak consumer sentiment and limited seasonal spending amid mild autumn weather.
The UK and Ireland markets, which contribute about 45% of Primark's total sales, have seen strain.
While the December holiday season provided a brief uplift, the overall trading environment in the autumn was marked by subdued activity. ABF cited this as a reflection of broader challenges in the UK retail sector.
Analysts at RBC (TSX:RY) Capital Markets expect operating margin to remain relatively stable year-over-year, supported by product mix improvements and cost efficiencies.
Within the Food segment, ABF's major Grocery brands have benefited from successful innovation and marketing initiatives. However, the Grocery segment has recently navigated a period of high input costs. Meanwhile, the Ingredients segment continues to demonstrate strong growth.
Analysts at RBC Capital Markets project that Sugar profits will be significantly lower in FY25 due to lower sugar prices and weaker demand in key markets.
However, a recovery is anticipated in FY26, driven by lower sugar beet costs, a rebalancing of supply and demand in the UK and Europe, cost savings initiatives, and improved performance in the African market
Despite the downturn in the UK, Primark reported growth in other markets. The company noted a 17% sales increase in the US and reported positive trends in Central and Eastern Europe, Spain, Portugal, and Italy.
However, these gains were insufficient to offset the decline in the UK, where the competitive retail landscape and shifting consumer behaviors continue to weigh heavily on performance.
ABF noted its ongoing store remodeling and expansion initiative, with eight new store openings during the period.
The retail challenges come amidst mixed results across ABF’s other business segments. Grocery revenue grew modestly, while the sugar and agriculture divisions faced declines.
In contrast, the ingredients segment recorded a 4% revenue increase, driven by strong demand in Central and South America.
According to Robinhood (NASDAQ:HOOD) UK lead analyst Dan Lane, "There’s a real worry that slowing growth in UK disposable incomes could have an outsized impact on lower-income households. That matters given 85% of Primark's products cost below £10, with the UK generating nearly 50% of its revenue.”
The rise of budget competitors, like Shein, presents a major challenge. Primark's lack of a transactional online platform is a significant disadvantage, despite the company emphasizing the in-store model.
Consumers increasingly expect online convenience, which Primark currently fails to provide.
“Click-and-collect doesn’t cut it these days and even if sales improve, it will remain a risk for the business as cheaper Chinese platforms encroach on the space as well as second-hand sites like Vinted,” Lane added.