Retail fears as high street success story Primark sees sales slow down

Primark, the discount fashion chain that has become a fixture on many a British high street after a major expansion drive, has seen its sales come off the boil as consumer confidence took a hit over the summer.

Shares in the firm's parent group, Associated British Foods, slipped 1.5 per cent as news emerged of a slowdown in sales growth.

Full-year sales and profits at the budget clothing business are still set to top forecasts, but there was a warning yesterday that cost increases and looming VAT changes would put margins under pressure next year.

Investors are bracing themselves for sales updates from the likes of Debenhams and Next in a busy week for the sector.

Most firms are likely to issue a similarly cautious outlook on trading.

At the 204-strong Primark chain, which accounts for about a third of group profit, like-for-like sales growth slowed to around 4 per cent in the three months to mid-September, making the year rise 6 per cent after a strong first-half performance of 8 per cent.

AB Foods finance director John Bason said the figure compared to nearly 10 per cent like-for-like sales growth in the previous fourth quarter driven by good weather in the summer of 2009.

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

Primark, which recently unveiled plans to open a store on Edinburgh's historic Princes Street, is juggling with a hike in cotton prices and higher freight expenses.

Cotton recently hit a 15-year peak after global supplies tightened following the devastating floods in Pakistan - the world's largest cotton grower.

AB Foods is also fighting against soaring wheat prices at its food arm, which includes Kingsmill and Allinson bread company Allied Bakeries.

The wider group saw a "substantial" rise in underlying earnings during the second half.

Despite yesterday's stock market weakness, shares in AB Foods have risen by almost a third since the start of the year compared to a 2 per cent rise in the FTSE 100 index.

Graham Jones, an analyst at house broker 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."

Fellow brokerage Charles Stanley maintained its "reduce" recommendation and is advising investors to switch from AB Foods to Unilever.

Analyst Jeremy Batstone-Carr said: "The strong performance had been anticipated, thus attention is likely to focus on cautious comments pertaining to fiscal 2011, especially in retail operations."

AB Foods - 55 per cent owned by the family of chief executive George Weston - will report results for its full year to 18 September on 9 November.

They are likely to be further aided by strong profits growth at the Silver Spoon sugar division.

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 group's groceries division.