Discounts eat into margins at retailer Primark

Parent company food and retail group Associated British Foods said summer sales on the UK high street came earlier than in previous years and price cuts are bigger than before.

The deep discounting comes on top of higher cotton costs, which have already hit Primark’s earnings.

ABF’s finance director John Bason said: “The summer sales have been brought earlier and deeper. The UK high street is a tough place with a real squeeze on disposable income and people are being careful on what they spend.”

Despite the pressure, the company said in a trading update that it still expects little change in the group’s earnings for the year ending on September 17.

Mr Bason is more upbeat about the prospects for next year with 10 new stores set to open and, together with store extensions, this should add around 10 per cent to Primark’s total floor space for the year to September 2012.

The recent fall in cotton prices from peak levels in March will help cut input costs.

Primark took the decision earlier this year not to pass on the bulk of the hike in cotton costs to consumers in order to stay price competitive.

As a result it suffered a dip in profit margins.

Analyst Graham Jones at house broker Panmure Gordon cut his forecast for Primark’s annual margins from 10.7 per cent to 10.2 per cent, which compares to 12.5 per cent the previous year. Mr Bason said that Primark’s trading had held up well with overall sales up 13 per cent for the year and like-for-like sales were up three per cent after a similar first-half rise.

He said Primark had a good fourth quarter with third and fourth quarter like-for-like sales both up three per cent.

The 223-store chain will be further boosted by the opening of a new 46,000 sq ft Primark this week at the new Westfield Stratford City shopping centre next to the 2012 London Olympic Park.

Primark has opened stores in Scunthorpe, Ilford, Kings Lynn and Stockport during the past six months.

The company, which also sells Silver Spoon sugar, Kingsmill bread, Mazola vegetable oil, Ovaltine drinks and Twinings tea, reported higher than expected sugar profits thanks to gains in Spain, Africa and China.

This will help offset the Primark margin fall in overall results.

The UK grocery arm and tea and drinks business Twinings Ovaltine both performed well.

However, bakery division Kingsmill only partially recovered higher wheat costs, while foods distributor Westmill was hit by a slowdown in the Chinese and Indian restaurant trade.

James Dawson, an analyst at broker Charles Stanley, added that a good performance from sugar helped offset some of the weaker results elsewhere, but with pressure continuing on margins there is a risk forecasts could be lowered.

The company has offloaded its Quorn business to tackle its huge debt mountain.

Yesterday ABF confirmed that the Vivergo bio-ethanaol plant in Hull is expected to be completed in spring 2012 after a number of delays.

Analyst Darren Shirley at Shore Capital said: “Looking into 2012, we continue to expect a very strong year for sugar, with the UK to benefit from substantially higher contract prices.

“Grocery sales and profits are expected to be ahead of the prior year, with growth driven by strong sales growth in Twinings Ovaltine in both developed and emerging markets, more than offsetting a ‘much weaker’ performance from George Weston Foods in Australia.

“In the UK, Allied bakeries is reported to have traded well, with Silver Spoon having a successful year.

“Westmill Foods remain constrained by weakness in the Indian and Chinese restaurant mar- kets.”

The group, which is 55 per cent owned by chief executive George Weston and his family, is due to report full-year results on November 8.

Leading light of £350m scheme

PRIMARK will be a key tenant at the landmark £350m Trinity Leeds retail scheme when the centre opens in 2013.

Primark joins two other leading UK retailers, Marks & Spencer and Top Shop, as an anchor tenant, attracting customers to the one million square foot scheme.

Trinity Leeds is the largest retail development outside the capital to get the go-ahead since the credit crunch.

It will feature an Everyman Cinema and two Conran restaurants.

The scheme’s parent Land Securities, the UK’s biggest property company, said it is making “excellent progress” with the development.