Now Primark begins to feel the squeeze

DISCOUNT fashion retailer Primark has reported a “noticeable” slowdown in UK consumer demand as tax rises and inflation squeezed consumer spending in the first two months of this year.

Primark’s closely-watched like-for-like sales growth slowed to three per cent in its first half, half the level achieved during its previous financial year.

Analysts said comparable sales growth in January and February had slipped to around two per cent.

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Primark is seen as a bellweather for the cheaper, youth end of the market in the same way that John Lewis is a predictor of middle class, middle-aged spending.

So far Primark has held up remarkably well, but the slowdown in growth is a worrying new trend for the youth end of the market.

Primark’s parent Associated British Foods said that while the discount chain traded well in the run up to Christmas despite the snow chaos, the mood had changed among UK shoppers since the start of the year.

It is also battling against an ongoing squeeze on profit margins since the new year VAT rise and impact of soaring global cotton prices.

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The update comes after a long period when Primark has weathered the recession and consumer downturn with forecast-beating sales growth.

Primark grew strongly through the recession as its cheap high fashion clothing became a hit with cash-strapped shoppers.

ABF’s finance director John Bason said: “The UK consumer is feeling a squeeze because of inflation and the VAT rise and simply has less to spend.”

He added that there was a “noticeable slowing down in UK consumer demand” since the New Year as he blamed commodity price inflation, especially higher petrol prices, and the rise in VAT to 20 per cent from 17.5 per cent previously.

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The rapid growth of Primark, which has 12 stores in Yorkshire, has been a major driver of the recent performance of ABF which also makes Silver Spoon sugar and Twinings tea.

Mr Bason warned Primark’s operating margins will be lower in its first half and will stay under pressure in its second half due to a near doubling of cotton prices as it aimed to stay competitive and not pass on all the cost rises to shoppers. The group also warned of lower annual UK sugar profits after severe winter weather increased processing costs and reduced the size of the sugar beet crop in the UK.

Analysts highlighted spiralling input costs and a weaker consumer environment and ABF’s shares closed down almost six per cent last night, a fall of 60.5p to 966.5p.

Analyst Sara Welford at brokers Citi said: “The statement is slightly disappointing, in particular the slowdown at Primark, which is a major driver of sentiment.”

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AB Foods gave an update yesterday for its half year to March 5 ahead of its full interim results on April 27, when it still expects adjusted operating profits to show growth with most divisions including Primark and sugar seeing increases.

Half-year sugar profits will be higher, driven by rises in Spain and China helping to offset flat UK profits, but higher processing costs will hit UK profits by £20m for the full year.

The group said a sudden thaw after sub-zero temperatures before Christmas hit the quality of sugar beet in the ground and led to a rise in processing costs.

Its UK sugar production this year is estimated to be just below one million tonnes compared with last year’s 1.3 million tonnes.

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Analyst Graham Jones at house broker Panmure Gordon held his forecasts for a 5.1 per cent half-year earnings rise to 32.1p a share and an increase of 2.7 per cent to 74.1p for the year to September, with sugar and agriculture helping to offset weakness at Primark and at its ingredients division.

Mr Bason said he expects other retailers to report consumers are reining in their spending this year.

“Even for people who don’t feel they will lose their jobs, they will feel they are being squeezed.

“It won’t just be Primark, but we’ll see it for a number of retailers.”

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Analysts at Royal Bank of Scotland said the update implied Primark like-for-like sales would grow at a slower pace of two to three per cent over the full year.

“This is likely to put further pressure on operating margin, which has suffered from absorbing the January UK VAT increase and rising cotton prices,” they said.

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