Primark margins shrink due to pound’s fall
Primark margins fell 1.7 percentage points in its first half year, largely due to the strength of the US dollar against the pound.
Kate Ormrod, lead retail analyst with GlobalData, described the fast-fashion retailer’s six months trading as “decent” despite the profit margin decline.
While overall operating profit rose 3.2 per cent to £323 million, bringing it back on par with the first half of the 2014/15 year, the margin fell to 10 per cent owing to the strength of the US dollar against the pound.
“Positioned at the value end of the market there is little room for price hikes across its core offer if it is to remain competitive, however rises on its pricier lines are already in force, albeit disguised by design and fit, ensuring prices can still be justified,” said Ormrod.
While group same-store sales were flat, UK same-store sales were up 2 per cent, helping to reach overall domestic growth of 7 per cent, which Ormrod described as “a pleasing performance given the struggles on the high street”, especially compared with the likes of New Look and Matalan.
“As ever, Primark’s offer remains appealing; as highlighted by the furore over its Beauty and the Beast merchandise – which also showcases the value player’s success outside of fashion.
“Diversifying its offer is a necessary step given shoppers’ clothing spending fatigue. Tapping into health & beauty’s resilience and the trend for affordable and fashionable homewares help drive destination appeal and will support growth; especially as clothing rivals such as boohoo.com lure customers away,” she said.
Primark is steadfastly continuing to shun online retailing, leaving physical store expansion as the driving force of growth. Sixteen new stores (including two relocations) opened across Europe and the US in the first half, leaving the retailer with 329 stores globally with a trading area of 13.1 million sqft, up 12 per cent year-on-year.
In the six weeks since the first half trading year ended, Primark has added 300,000 sqft, with a further 400,000 sqft to be opened by the year’s end.
“Unlike new entrant Pep & Co, rapid expansion has never been Primark’s strategy, with a measured and almost cautious approach, especially in new markets,” said Ormrod.
“While this means it will not be challenging for market leader position in the US any time soon, slow and steady expansion is a safe bet. However, with domestic expansion opportunities drying up, making a bigger splash abroad – especially in mainland Europe – will be needed unless it changes its view of online trading.”