Primark's cheap fashions keep driving AB Foods profits

LONDON Mon Feb 25, 2013 10:59am GMT

Stock is unloaded from a Primark lorry in central London November 5, 2012. REUTERS/Olivia Harris

Stock is unloaded from a Primark lorry in central London November 5, 2012.

Credit: Reuters/Olivia Harris

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LONDON (Reuters) - Discount clothing chain Primark's continuing popularity will push first half profits at Associated British Foods (ABF.L) ahead of last year, the conglomerate said, though growth in sales of the retailer's cut-price fashions has slowed a touch.

AB Foods said on Monday adjusted operating profit for the six months to March 2 would be higher than last year's 412 million pounds ($629 million) with earnings per share "substantially ahead" of the same period's 34.4 pence last year.

However, the company said its full-year forecast was unchanged because Primark's performance would be offset by a fall in profits at its sugar business, where sales in China are declining. AB Foods relies on Primark for about a third of its profit, with sugar and groceries making up the other two thirds.

In addition it cautioned that tough second half comparative numbers mean Primark's full year underlying sales growth is expected to be less than 7 percent.

With Britain facing a possible triple-dip recession, many retailers have been finding the going tough as consumers fret over job security and a squeeze on incomes. Primark, with its focus on low prices, has been one of the few to buck the gloom.

AB Foods forecast Primark's first half sales to be 23 percent ahead of the same period last year, helped by 15 new store openings. Sales at stores open over a year were seen up 7 percent.

While that underlying sales growth is well ahead of that being achieved by rivals, such as Next (NXT.L), it does represent a slowdown on growth of about 9 percent in the first 16 weeks of the half, reported in January.

"Primark has not stood still," Finance Director John Bason told Reuters. "Primark has continued to improve the range of clothing that it offers, the fashionability and the store environment. I think we are getting new consumers," he said.

Primark's profit margin was also much higher, reflecting the benefit of lower cotton prices and better trading.

Shares in AB Foods, which have increased by a half over the last year, were down 0.9 percent at 1,816 pence at 0945 GMT, valuing the business at 14.5 billion pounds.

"The shares have had a stunning run over the last 12-months from circa 1,100 pence at the start of 2012 ... we think the stock is due a pause for breath," said Panmure Gordon analyst Graham Jones.

AB Foods said first half profit from its sugar division would be lower than last year as a better performance from its main Illovo business would be offset by a decline in China and a 22 million pounds charge for the mothballing of two small Chinese beet factories.

First half revenue in the grocery division, whose brands include Twinings, Ryvita and Ovaltine, were forecast to be level, with "substantially improved" profit benefiting from the non-recurrence of restructuring costs. ($1 = 0.6551 British pounds)

(Reporting by James Davey; editing by Sophie Walker)

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