Primark warns of gloom in the New Year as sales growth slows

The Primark chain, owned by Associated British Foods, has grown strongly through the recession as its cheap high fashion clothing has become a hit with cash-strapped shoppers.

But the VAT increase, higher costs and spending cuts have raised doubts about the group's ability to outperform in the future.

The group's previous stellar like-for-like sales growth slowed to four per cent in the three months to mid-September, following first half growth of eight per cent.

AB Foods finance director John Bason said the four per cent increase compares to growth of nearly 10 per cent in the previous year's fourth quarter.

"We have to remain cautious for the outlook for the UK consumer," said Mr Bason.

A combination of higher cotton prices and freight costs, coupled with the VAT increase in Spain this summer and the impending VAT increase in the UK, will hit margins next year.

Analyst Graham Jones at Panmure Gordon said: "Given the strong share price performance, we believe the shares are due a pause for breath and move our recommendation from buy to hold."

Analyst Andrew Wood at Sanford Bernstein added: "We expect the market to react negatively to slowing like-for-like sales growth at Primark and pressures developing for 2011."

The slowdown forecast for next year is in sharp contrast to this year's outperformance.

ABF said 2010 second half profits will show a substantial increase resulting in "very good" progress in year earnings.

The company, which also sells Silver Spoon sugar, Mazola vegetable oil, Ovaltine drinks, Twinings teas and Quorn meat substitute which is made in North Yorkshire, has continued to show a recovery at its sugar and grocery businesses after a period of heavy investment.

The 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 the group is battling against soaring wheat prices at its food arm, which includes Kingsmill and Allinson bread company Allied Bakeries.

"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 group said.

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.

ABF remained tight-lipped about whether it will pass on extra costs or the January VAT rise to Primark shoppers.

But Mr Bason signalled the potential for higher bread costs on the shelves due to the wheat pressures seen in its bakery arm.

He said: "The increases in the cost of wheat means we are having conversations with retailers."

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

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.

The food and retail group, 55 per cent owned by the family of chief executive George Weston, will report results for its full year to September 18 on November 9.

Shares closed last night down more than 1 per cent, or 16p to 1072p.

Success through word of mouth

Primark has very low costs which enable it to offer some of the lowest prices on the high street.

It has no advertising budget, relying instead on customers to spread the word.

It buys and sells in bulk and its 198 stores across Europe give it the buying power to pass cost savings back to customers.

Primark moved into Britain from Ireland in 1973 with four out-of-town stores.

The following year saw the opening of the first UK high street stores. In the next ten years, 18 stores were added in the UK.

From 1984 to 1994 a further 13 stores were opened in Britain. In 1995 the group bought the BHS One-Up discount chain.

In 1999 the group bought 11 stores from the Co-Op and in 2000 it acquired 11 C&A stores.

In 2005, six stores were acquired from Allders and it bought Littlewoods' 120 stores.

In May 2006, Primark opened its first shop in Spain in Madrid and its first one in the Netherlands in December 2008.

A year later it expanded into Portugal, Germany and Belgium.