Primark puts low prices before profit as costs rise

The combative stance will result in flat annual earnings, but the group said it is “determined” to ensure Primark stays a price leader on the high street to help revive sales growth.

ABF chief executive George Weston said Primark, whose top-selling lines include tribal-print maxi dresses and tassel shorts, would not surrender its price leadership in clothing.

Mr Weston, whose family holding of 55 per cent in ABF makes him one of Britain’s richest chief executives, said the group would take a hit to its profit margins to soften the blow for customers from the recent sharp rise in cotton and other input costs.

“We are determined to be the best value on the high street, so we are going to absorb more of the cost increases at Primark,” he said.

Cotton prices are still high, although below the record highs seen in March, while Mr Weston said freight and labour costs have also risen.

The announcement overshadowed interim results showing a seven per cent rise in underlying pre-tax profits in the six months to March 5.

Primark saw a sharp slowdown in operating profit growth during the half-year, up five per cent to £151m compared with a 35 per cent improvement in 2010.

Like-for-like sales rose three per cent – half the level achieved during the previous financial year.

The group joins a growing list of UK retailers suffering as shoppers are hit by rocketing petrol prices, food inflation and Government austerity measures.

ABF said first half margins were impacted as it absorbed the January VAT increase and higher cotton costs.

Charles Sinclair, chairman of ABF, said: “We are determined that Primark will retain its position as price leader and margins in the second half will be lower than previously planned.

“As already highlighted, the higher cost of UK sugar production this year and the cost of third party sugar purchases will also affect second half profitability.

“We continue to expect good revenue growth for the full year, although adjusted earnings are now expected to be similar to last year’s very strong result.”

ABF is also facing higher input costs in its wider business, including household brands such as Silver Spoon sugar, Kingsmill bread and Twinings tea.

The group delivered more bad news for hard-up consumers as it said it was continuing to increase prices across its grocery arm to offset cost pressures, which is leading to higher prices in supermarkets.

These price increases, together with cost savings, helped the group grow grocery earnings by 17 cent to £111m in the first half.

Its sugar business also delivered a double digit rise in profits, up 27 per cent to £108m, as strong performances in Spain and China offset weakness in markets such as the UK.

But earnings at its ingredients arm plunged by 38 per cent amid “competitive pressures” and higher costs.

Graham Jones, an analyst at Panmure Gordon, cut his full-year forecast for pre-tax profits by 2.6 per cent to £843m after the warning.

But he said he was encouraged by signs of recent improvement at Primark after ABF said it was “very pleased” with sales since the end of February following a difficult start to the year.

“While margins look set to fall by more than initially expected, we only expect them to return to 2009 levels despite very little pricing action to recover higher VAT and cotton costs,” added Mr Jones.

He said Primark largely absorbed the VAT increase and cotton cost rises with only modest price rises in its stores last autumn.

Late last month, Primark’s rival Hennes & Mauritz AB also decided not to pass on surging cotton costs to its customers and saw a 30 per cent fall in quarterly profits.

Food giant battles volatile markets

Hovis and Mr Kipling firm Premier Foods warned of a further round of price rises saying that raw material costs remain volatile.

The UK’s biggest food manufacturer said commodity and packaging costs showed a year-on-year percentage increase in the low teens in the three months ended March 31.

The company also reported a 3.8 per cent decline in sales volumes in the quarter.

The company said its “drive” brands, such as Hovis, Mr Kipling and Sharwood’s, saw sales volumes decline 1.3 per cent, while core brands, such as Batchelors, Bisto and Branston, had a “difficult quarter”.

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