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Primark to lift prices as inflation dents owner profits

Primark owner Associated British Foods has said it will raise prices to offset the impact of rising inflation, which it warned is set to drag down profits this year and next.

The FTSE 100 company said higher costs for commodities, transport and energy were being felt across its businesses, which include food groups Allied Bakeries, Ryvita, Twinings teas and Dorset Cereals, while price hikes to offset the impact would take time to filter through.

Operating profit margins at the discount fashion chain are set to drop from 11.7 per cent in its first half to roughly 10 per cent for the full year. The retailer will increase selling prices for some autumn and winter ranges to offset higher costs.

“Sales and profits returned to pre-Covid levels [in the first half] but now we have to deal with inflation,” said ABF chief executive George Weston. “The macro environment is very difficult.”

He cited bakery as an area under particular pressure. “Wheat prices have gone up in two waves, gas prices have quadrupled and more and distribution relies on diesel.”

House broker Credit Suisse reduced its earnings forecasts by 8.6 per cent for the current year and by 14.1 per cent for the year to September 2023. Analyst Simon Irwin said it would take “six to 12 months” for the margin outlook to become clearer.

Shares in ABF were more than 5 per cent lower in mid-morning trade on Tuesday, and have fallen almost a quarter so far this year.

Primark, which has no ecommerce operation, benefited from the easing of lockdown restrictions and new store openings. But same-store sales are still down on pre-Covid levels — by 8 per cent in the UK and 14 per cent in Europe — and Weston said that in terms of costs “just about everything is going up”.

He added that while Primark would “take a margin hit” on the spring and summer ranges currently on sale, some prices would rise in the autumn, though he declined to say by how much.

“We are committed to remaining the best value fashion retailer in stores or online, whatever it takes.”

Primark will continue to open new stores, especially in the US and southern Europe, and Weston said there had been significant improvements in same-store sales in recent weeks with travel and beauty-related lines selling particularly well.

“Europe is behind the US and UK in terms of lifting Covid restrictions. Mask-wearing mandates only ended in Spain and Portugal last week and they are still in place in Italy,” he pointed out.

Primark’s sales were up 59 per cent year on year to £3.54bn in the 24 weeks to March 6, with adjusted operating profit of £414mn against just £43mn in the same period last year.

The group still expects profits to rise in its sugar business and said its ingredients division was also more insulated from commodity price pressures than other units.

Group pre-tax profit in the first half more than doubled to £635mn after sales rose 25 per cent to £7.88bn, largely reflecting the recovery at Primark.

The interim dividend was 13.8p a share, up from 6.2p last year.

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