LONDON -- If you look at their Christmas trading statements, you'd think they were on different planets -- or at least in different countries, different times, different markets. But the difference between them isn't just for Christmas.
Primark, the budget clothing chain that accounts for a third of Associated British Food's (ABF +1.13%) operating profit, delivered a sparkling 25% rise in sales in the 16 weeks to Jan. 5. High-street icon Marks and Spencer's (MKS 0.76%) sales in the last quarter of 2012 were barely above the previous year's, and it was only food sales that made for a halfway respectable showing. General merchandise was down 2%, or 4% on a like-for-like basis.
One quarter's trading does not make an investment case. But the performance at the end of last year is a manifestation of two big differences in the companies' strategies.
Value versus margin
First, on margin. Primark has kept true to its budget-conscious proposition. That's not a one-quarter initiative. All through 2011, when fashion retailers were upping their prices in response to rising cotton prices, Primark made a clear commitment to maintain prices and take a hit on its margins. It's been rewarded with booming sales from loyal customers who know they'll get good value.
M&S stood aloof from festive discounting. It said it maintained "a focus on full-price sales" in general merchandise, so "protecting our gross margin." Shoppers voted with their feet.
Second, in positioning. Though it's unashamedly a budget chain, Primark's trick of getting versions of high-end fashions into stores quickly has earned it a cachet among fashion-conscious shoppers. Its nickname, "Primani" (Primark + Armani), is a marketing gift. It precisely sums up the brand's offering, but it's not the result of a branding exercise, it's how its customers see it. And though popular with high-spending young fashion-conscious shoppers, it has maintained a wide demographic appeal.
M&S has a similar wide target market. But its image, if it has one, is a stuffy one. Many think CEO Marc Bolland's job is on the line. He's putting his faith in a new retail team and their autumn/winter collection that will hit the stores in July. But it's a brave investment strategy that depends on the success of a new fashion collection.
Model or management?
Of course, M&S has a broad range of general merchandise, plus its food segment, which is enjoying success. But faltering performance in general merchandise suggests either the beds-to-bras-to-bread business model no longer works, or that management is failing.
M&S is also doing well overseas, especially in China and India. The company says it's transforming itself from a traditional U.K. retailer to an international multichannel retailer. But the lesson of Tesco's annus horribilis of 2012 is that investors will punish any neglect of the home market.
Primark is also successfully expanding internationally, but in Europe. Its proposition has been well received in Spain, and more surprisingly in Germany. Though it recently opened a second flagship store in London's Oxford Street, international expansion will provide it with better growth prospects.
Primark sits oddly in the now somewhat ill-named Associated British Foods. But with the company controlled by the Weston family, who own 54%, there doesn't seem to be any likelihood of a fast buck for investment bankers in demerging it.
Nuggets
To my mind, Primark is one of three core nuggets of value in ABF. The other two are its strong collection of consumer brands such as Twinings and Ovaltine, and its leading global position in sugar processing.
That's why I'm a long-term holder of the shares. They've enjoyed a good run, up a third over the past six months. So they're pretty expensive compared to the market, trading on a price-to-earnings ratio of 19 against M&S's 11.
But it was Warren Buffett who said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." So I'm happy to hold on to my shares, and if you're an investor with a long-term perspective, they're well worth a look.
Buffett hasn't invested into ABF -- he rarely invests outside the U.S. -- but he has made one investment in the U.K. It's an object lesson in long-term investing, from one of the most successful investors ever. To find out more about that, you can download this report from the Motley Fool: "The One UK Share Warren Buffet Loves." It's free and you can get it delivered to your inbox by clicking here.
