Associated British Foods will take a hit to its full-year earnings by cutting margins at its star-performing discount fashion retailer Primark to absorb spiralling costs and defend its market position.
The strategic move to cut margins overshadowed the group beating half-year earnings forecasts and AB Foods shares dipped over 5 per cent today, with the group's house broker Panmure Gordon trimming its full-year earnings forecasts.
Chief executive George Weston said Primark, which trades as Penneys in Ireland, would not surrender its price leadership in clothing and will take a hit to its profit margin to soften the blow for customers from the recent sharp rise in cotton and other input costs.
He said the decision to absorb more of the input cost rises at Primark and the higher costs of processing sugar beet in Britain had led the group to cut its full-year forecast to flat earnings, from a previously expected rise.
"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," Mr Weston said.
Cotton prices are still high but off record highs seen in March, while Mr Weston said freight and labour costs had risen, as had the VAT sales tax in Britain in January.
Operating margin across Primark's 214 stores dipped to 10.7 per cent from 11.4 per cent previously, and full-year margins were likely to be around 10.9 per cent, well down from 12.5 per cent in 2009/10 and near 10.9 per cent in 2008/09.
"Management expects margins to reduce further in H2 as higher cotton costs, the January VAT increase and continuing weak UK consumer demand take full effect," said analyst Dirk Van Vlaanderen at brokers Jefferies International.
Analyst Graham Jones at house broker Panmure Gordon trimmed his earnings forecast for the year to mid-September by 1 per cent to 73.2 pence per share.
The group, 55 per cent owned by the family of chief executive Weston, posted adjusted earnings of 32.9 pence a share for its half-year to March 5th, beating a consensus forecast of 32 pence and compared with a previous 30.5 pence.
The group, which also markets Silver Spoon sugar, Twinings tea, Ovaltine drinks and Kingsmill bread, said it half-year dividend rose 4 per cent to 7.9 pence.
Its sugar side has gained from world sugar prices which, although down from February's record highs, are still at a high levels and helped boost AB Foods' operations in China and Spain, offsetting a fall in majority-owned Illovo.
UK sugar profits for the full year will be hit by £20 million of extra costs for processing sugar beet damaged by freeze-thaw weather in Britain before Christmas.
Reuters
