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Primark profits snipped by price-cutting rivals

Primark parent company Associated British Foods says profits are being trimmed at the fashion discounter, but the group’s sugar business is full of energy

The fierce price war between high street fashion retailers finally caught up with arch-discounter Primark today when it admitted profits were on the wane.

Primark, which has led the way for cheap chic on the high street, has been hit by heavy and prolonged price cutting by its rivals, its owner Associated British Foods said. The conglomerate’s full-year trading update hinted at slightly weaker profitability for the discount retailer, even as it continues its rapid expansion. Sales growth stood at 13%, with 10% of the growth coming from new store openings. The retailer is to open stores at Westfield Stratford City, in Edinburgh, and a second store on Oxford Street in London.

There will be 223 Primark stores by the year end, ABF said, with 7.2m sq ft of selling space.

Finance director John Bason said the margin hit was “more at the edges” than anything else.

“People have been expecting the margins to come down at Primark. A year ago we said cotton prices are going up. The decision we took at Primark was to say we are not going to pass on all of the increase in cotton prices. Primark trading has been strong [as a result]. Consumers are looking for value, and what we have seen from other retailers is earlier sales, longer sales, and deeper discounts.”

Cotton prices have now fallen significantly since their March peak. Bason said that would provide a tailwind for next year’s results, with the cheaper input costs reflected in the retailer’s 2012 spring/summer collection.

The softer period for Primark was offset by strong figures from Associated British Food’s sugar division, where high prices meant profits would be “well ahead of last year”, ABF said.

The company’s UK crop was damaged by last winter’s poor weather, but those problems were offset by gains elsewhere.

ABF also said its grocery brands had performed well.

“Twinings Ovaltine maintained the momentum of the first half, achieving strong sales growth in tea in both the US and the UK, and from Ovaltine in Thailand and developing markets. Improvements were made in tea product quality and packaging, facilitated by recent investment in new production lines. In the UK, Allied Bakeries traded well with success for Kingsmill bakery snacks and rolls, and strong growth in the 50/50 range,” the statement said.

Margins fell at its ingredients business, ABF said. “The European yeast market has been extremely competitive and margins have suffered from an inability to recover fully raw material cost increases.”

Julian Hardwick, an analyst at RBS, said: “The Primark figures were no surprise given the consumer spending backdrop and the retail climate.”

Analysts at Credit Suisse said the outlook was particularly good for ABF’s sugar business. “Sugar … is beginning to shape up for a very strong 2012.”

Associated British Foods shares closed down 18p at £10.52, a fall of 1.7%. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds