Primark has vowed to maintain its price position

Primark has vowed to maintain its price position

Discount fashion chain Primark is committed to remaining "the best value on the high street," the company told just-style today (9 November), even though it has warned rising cotton prices are set to hit profit margins in the coming year.

"We're not going to [quantify the impact higher cotton prices will have on margins at Primark]," John Bason, CFO of parent group Associated British Foods (ABF) said. "We're saying absolutely that Primark will maintain its price position."

The firm, ranked the UK's largest clothing retailer in terms of volume, said the business would absorb soaring cotton costs to keep prices low, and that it doesn't expect the cotton price to affect sales growth.

"Cotton prices are getting on to double where they were a year ago. It's not us crying wolf. It is a major input and it has moved really quite sharply," Basson said.

He added that like all retailers Primark has "got a number of levers to pull" in terms of managing the cost increases - but has an added benefit "in the leverage of increased volumes."

"[Primark] will do well on the back of that. The margins improved in the last year on the back of that, and it's that momentum that will obviously help us in the coming year."

Speaking to analysts earlier today, ABF chief executive George Weston agreed that while "cotton costs are the big one," the retailer is also juggling wage inflation in China and rising freight prices.

But he said while wage inflation in China has been running at 10%-plus for a number of years, labour productivity improvements have kept pace with the rate of wage increase, "so the net increase in labour costs over the last five years in China has been about zero."

Freight rates he also sees returning to more normal levels after falling substantially during the economic turmoil of 2008. He added: "The increase in the value of the euro against the dollar is helping us; the value of sterling against the dollar is helping us. So there are some roundabouts to go with the swings.

"The big one is cotton. The second biggest after cotton is VAT." Increases in VAT have already been implemented in Spain and are planned for the UK in January 2011.

"Outstanding" full year
The executives were speaking after ABF published its full-year results for the 12 months to 18 September. ABF said Primark posted a 35.3% rise in annual operating profit before exceptional items to GBP341m (US$551m), up from GBP252m the year before.

Revenues at the fashion chain jumped by 18% to GBP2.73bn, while like-for-like sales were up 6%, helped by the addition of new stores and a strong performance in continental Europe, especially Spain. Operating margins rose to 12.5% from 10.9% a year earlier.

Same-store sales in the UK were "strong, particularly by comparison with other high street retailers," it said.

Primark has 204 stores, mostly in the UK, which is its biggest market with over 70% of the group's total retail space. It also trades in the Irish Republic, Spain, Germany, Portugal, the Netherlands and Belgium.

Among its plans to maintain its competitiveness in the face of rising costs are moves to continue the chain's expansion both in the UK and overseas. At least 14 new Primark stores will open in the coming year.

"The strategies will be a continuation of where we've been," Basson told just-style. "Number one, we will continue with store expansion. We've given a clear indication that we're going to have at least eight stores opening up in the UK over the coming year.

"The second one is the consumer proposition. We have gone another step forward in terms of the window displays, how things are merchandised in store, fashionability and so forth.

"What we're selling in store, the number of stores we've got in the UK, we've got all of those things going for us and maintaining that price leadership."