Primark owner warns over cost pressures

Primark parent Associated British Foods said full-year sales and profits at the budget clothing group were expected to be "well ahead", but added that increases in its costs and looming VAT changes would put margins under pressure next year.

AB Foods is also fighting against soaring wheat prices at its food arm, which includes Kingsmill and Allinson bread company Allied Bakeries.

Primark's caution over the cost of cotton and freight expenses follows similar news from retail giant Next last month. Primark has 11 stores in Yorkshire

Cotton prices are running at 15-year highs as global supplies have tightened following the devastating floods in Pakistan - the world's largest cotton grower.

Retailers are also faced with having to pass on higher VAT charges as governments act to cut their deficits.

Primark is being hit with tax increases in its two main markets, with Spain having already implemented its increase and the UK set to follow with a rise to 20 per cent in January.

But the current year to September 18 is expected to be another robust one for Primark, with the group on course to report a 6 per cent rise in like-for-like sales.

It is also continuing to ramp up store openings, having opened eight in the last six months to take its estate to 204.

The wider AB Foods business saw a "substantial" rise in underlying earnings during the second half.

The Allied Bakeries arm has benefited from the success of the Little Big Loaf, launched last autumn, which helped overall revenues rise modestly in the groceries division.

But AB Foods said: "The market has remained very competitive in the second half with high levels of promotional activity, and much higher wheat costs seen in recent weeks will put pressure on margins next year."

The Twinings Ovaltine business maintained first half profits growth, largely driven by progress in North America and the UK, although Thailand is also becoming a successful market for Ovaltine after the launch of a cold drink version in recent years.

Annual results will be helped further by strong profits growth at the Silver Spoon sugar division.