Primark is taking on only a handful of former BHS stores including Reading, Llandudno and Leicester’s Fosse Park as it tackles falling sales and a £200m-plus leap in its pension deficit.
Sales at the cut-price fashion chain’s established stores slid 2% in the UK, and for the group as a whole, in the year to 17 September, as it struggled against a warm autumn, chilly spring and difficult July, when shoppers were put off by the Brexit vote.
Parent company Associated British Foods (ABF) added that the EU referendum’s impact on bond yields would have a detrimental effect on its pension fund, pushing it to a year-end deficit of £200m, compared to a small surplus last year. The company said pension service costs next year would be higher and John Bason, ABF finance director, said it was likely to be one of a number of businesses warning on the issue.
Shares in ABF dived nearly 11% to £28.15 and were the biggest faller in the FTSE 100 index in the light of the poor sales at Primark and the big jump in the pension deficit.
Bason said shoppers had a “bit of a shock” for a couple of weeks after the EU referendum on 23 June but trade had bounced back with better weather from late July. “You can’t see from the UK consumer a [long-term] Brexit effect,” he said.
ABF said Primark’s total sales for the 53 weeks to 17 September were 9% higher than a year earlier, stripping out currency fluctuations. But the company blamed unseasonal weather for an expected fall of 2% for sales at established stores. It said temperatures were unusually warm before Christmas and very cold in early spring.
The company warned in April that trading was tough for Primark after the chain suffered its first half-year fall in underlying sales for 12 years. In July it said sterling’s fall would have mixed results for its overall business and that Primark’s margins would be hurt.
The pound has fallen against the dollar for the past two years, dropping about 20% in that time, but the decline accelerated after the vote to leave the EU. Sterling has dropped more than 10% since the referendum on 23 June as traders expected lower interest rates and a slowing economy.
In its trading update, ABF said overall trading for the group was ahead of its earlier expectations, helped by improved performance at its sugar business and rising profits at its grocery and food ingredients operations.
It added that Primark would not get a major lift from the demise of BHS, which closed the last of more than 160 stores in August, and planned to take on only a “small handful” of premises vacated by the defunct chain.
Primark has recently opened an outlet in BHS’s former Fosse Park store in Leicester and will open in Carlisle in October after the council bought back the lease. It is also moving into former BHS stores in Reading and Llandudno.
Bason said the new stores were part of ongoing expansion in the UK that formed part of 1.3 million sq ft of new space planned around the world in the year ahead. That included three more stores in the US, taking the total to eight, three more in Italy, where it currently has just one outlet, and three or four more in France, where it has eight stores.
He said Primark was “well placed” for the run-up to Christmas as it was determined to keep prices low despite a squeeze on profit margins caused by the pound’s fall since the EU referendum. He said the retailer was “committed to leading the value sector”.
Bason said retailers’ costs were likely to rise towards the end of 2016 as a result of sterling’s decline against the US dollar, which it uses to buy much of its products overseas, but it was too early to see what effect that might have on trade.
“The UK consumer at the moment still has more money in their pocket but it awaits to be seen how much general inflation happens in the economy,” he said.
