Associated British Foods (AB Foods) has reported double-digit sales growth at Primark over the key Christmas trading period but again warned the retailer’s profits would be squeezed by the rise in cotton prices.
Sales at the value retailer increased by 13% in the 16 weeks to January 8, which was in line with the management’s expectations and was helped by opening 10 new stores in the period.
Its operating margin increased over the period but was set to come under pressure as it absorbed some of the cost of the soaring price of cotton and the rise in VAT as part of its commitment to compete with high-street rivals.
AB Foods also reported that its Kingsmill bread division grew its market share, helping overall sales increase 7% in the period.
But it warned the recent weather conditions had impaired the quality of its sugar beet crop in the UK, which could reduce profits at its sugar division.
AB Foods said Primark’s like-for-like sales figure, which strips out sales from newly-opened stores, had shown “good” growth but did not provide an exact figure.
Martin Deboo, an analyst at Investec Securities, estimated that like-for-like sales increased by about 4% or 5% in the period, which was in-line with the previous quarter.
Mr Deboo added: “AB Foods are sounding bullish on Primark store openings and are indicating something like 220 stores by the year end, a 2% upside to our current forecast of 216.”
AB Foods’ grocery division, which includes Ovaltine, Twinings tea, Kingsmill and the Patak’s spicy food range, is also facing rising commodity costs, with wheat, corn, spices and oils having become more expensive.
It said it has already started to put up the prices of the goods it sells and warned that any delays would adversely affect its margins. Shares in AB Foods were down 3% following the update.