April 23, 2014 2:18 pm

AB Foods: UK retailers in the US

Given history of British retail failures in the US, why is Primark going to Boston?

At least it will be easy for bargain hunters to find. Primark’s decision to locate its first US outlet on the site of Filene’s – a now-closed Boston department store famous for its bargain basement – is historically poignant if nothing else. The UK-based discount clothes chain will feel at home when it moves in next year.

In a triumph of hope over experience, investors cheered the news. Shares in Primark owner Associated British Foods rose 8 per cent. UK retailers – most recently Tesco – have a mostly dismal record in the US. Primark will be taking on the likes of TJ Maxx (located just down the street from Filene’s) and Target. Market valuations are optimistic for Primark. On 27 times forecast earnings, AB Foods shares are at a premium to both rivals: TJX Companies is on 17, and Target 13.

But it is not hard to see why AB Foods is so keen to take a risk in the US. Primark is the biggest and most exciting part of the group. Its profits grew 26 per cent in the first half of the current fiscal year and it produced a return on capital of 32 per cent. Other businesses in the conglomerate are duller. First-half profits in sugar fell by almost two-thirds as prices fell.

And what really drives Primark is expansion. Same-store sales grew 4 per cent in the first half – pretty good, although less healthy than the 7 per cent in the same period last year. To keep double digit growth going it needs to keep building. Primark has 160 stores in the UK and 70 in continental Europe. The US is the next logical step, although sticking with European expansion alone would have been lower risk. Still, Primark will not bet the farm in the US. Net debt stands at £827m, which is less than 0.5 times earnings before interest, tax, depreciation and amortisation. US expansion costing, say, £100m to £200m is – much like its products – easily affordable.

Email the Lex team in confidence at lex@ft.com

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