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Primark's growth slows in first half

Primark’s profits grew 5% in the first half of the year, and while the company said trading in the UK had shown signs of improvement after a disappointing start to 2011, the value chain expects margins to fall off in the remainder of the year.

Operating profit in the 24 weeks to March 5 rose from £144m to £151m, while sales grew 11% to £1.41bn or 13% at constant exchange rates. Like-for-likes were up 3% in the period. The results marked a slowdown in the growth of Primark’s profits, which soared 35% in 2010.

The company, which is owned by Associated British Foods (ABF), said the performance of its growing business in Continental Europe was “very encouraging” but in the UK, the company said that after a strong start to its financial year, trade had weakened after the New Year. However, the company said it was “very pleased” with its sales performance since the end of February.

Margins in the first half were lower due to higher VAT and an increase in input costs, especially cotton, and the company said it expected margins to fall futher in the second half.

Ten stores opened in the period and six more are due to open in the second half; three in the UK, two in Portugal and one in Spain. Five stores are expected to open in Germany in the first half of the next financial year.

“Much has been reported in recent weeks about the contraction in the personal disposable income of the UK consumer due to higher fuel costs, food inflation and fiscal tightening”, said Charles Sinclair, chairman of parent company Associated British Foods. “In this context Primark’s performance demonstrates the strength of the brand and provides reassurance for the continued development of the business”.

Panmure Gordon analyst Graham Jones said a 3% like-for-like increase was a “good performance” albeit on top of 6% growth last year. He added that the “notable slowdown in UK growth in January and February “had caused some concern” but that ABF’s assurance that sales had been “pleasing” since the end of February was “encouraging”.

He added: “However, Primark’s commitment to price leadership means we think it has largely absorbed the VAT rise and cotton price increases with only modest price rises last autumn. As such EBITA margins fell from 11.4% to 10.7%, leaving EBITA up 5% to £151m. While we have nudged up our second half like-for-like sales growth assumption from 1% to 3%, we have cut our full year margin assumption from 11.6% to 10.8% - although we note this only brings it back to the 2009 level.”


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