Primark has continued to buck the high street trend, but now cites a squeeze on margins

Primark has continued to buck the high street trend, but now cites a squeeze on margins

Associated British Foods (ABF), the parent of value retailer Primark, today (28 February) indicated that trading at the fashion chain had been depressed since the start of the year.

Primark, which has repeatedly warned that rising cotton prices are set to hit profit margins in the coming year, said like-for-like sales rose 3% in the first quarter. But total revenue growth of 11% was attributed to more encouraging trends in continental Europe.

The retailer flagged up the rise in VAT, together with soaring input costs, as its main concerns.

Here's what the analysts have told just-style about Primark's trading update:

Nick Bubb, analyst at Arden Partners: "We keep a cautious outlook on the high street after these results. If Primark is having a tough time it spells trouble for New Look and other value clothing retailers too. The company seems to be experiencing some top-line and bottom-line pressure, which isn't helpful to ABF.

"Consumers have been turned off by a lot of gloomy chatter in the press relating to the VAT increase and rising petrol prices. And the mass market driven by petrol prices a surprising amount."

Maureen Hinton, practice Leader at Verdict: "The benefit of having a growing international business is evident in its trading update. While the overall 3% like-for-like uplift suggests like-for-like-sales growth in the UK is negative, and margins are under pressure from input costs, the retailer is still producing strong overall growth thanks to continental Europe and new store openings.

"Though it has opened more stores in the UK, and will continue to do so, the steep growth curves will come from new markets where its proposition has greater impact. Primark needs to gain scale and critical mass in these continental markets in order to gain more volume advantages – particularly in distribution – and that will help to bolster its margin."

Shore Capital analyst Darren Shirley: "The slowdown in trading performance at Primark in the UK is probably a greater concern than the issue of rising cotton prices impacting gross margins. As we outlined in our commentaries last week on the UK retail scene, market level demand seems to have been especially poor in February and whilst we do not take out our red downgrade pen just yet the likelihood of downgrades in the broader retail space must be growing.

"From opposite ends of the retail spectrum Primark and John Lewis are recording tough trade and they are both best in class."