Primark owner tumbles as it warns of sterling blow

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Shares in Primark owner Associated British Foods fell sharply earlier after it warned that margins at the low-cost fashion retailer would be hit by the fall in sterling next year. 

“Primark is committed to being the best value in clothing,” said finance director John Bason. “That means consumers will see us standing by them when the UK is facing upward inflationary pressures. 

“We did the same thing when cotton prices surged a couple of years ago and we took it on the margin rather than raising prices for customers.”

The international clothing industry prices its goods in dollars so Primark will have to pay about 10% more in pounds to stock its shelves in the UK next year.

The shares today fell 206p, or 6%, to 2950p as investors reacted to the implications. 

Primark saw a 9% rise in sales in the year that ends this weekend, all of which came from its expansion — particularly in the US and Europe. Sales from stores open at least a year were down 2% due almost entirely to unseaonably warm weather before Christmas and very cold weather in March and April. 

The food side of ABF, which ranges from sugar to Twinings teas, broadly had a good year. It is here that the firm will gain from sterling’s weakness with about £500 million of its annual sales in currencies other than the pound. 

ABF also said that its pension fund will swing from a  modest surplus last year to a deficit of £200 million  this year because of the fall in long-term gilt yields caused by quantitative easing. 

However, Bason said that this was not particularly serious in the context of a fund with a total value  of £4 billion. 

Looking forward, while Primark margins will reduce, profits from sugar are likely to improve sharply in the coming year. Barclays is forecasting a 7% increase in sugar margins thanks to higher prices and lower costs for the UK sugar beet industry. 

The company is also set to book a profit of about £250 million from selling its share of a sugar joint venture in China. 

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September 12, 2016 |
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