The owner of Primark has hinted at job cuts across the discount retail chain as soaring costs and a probable drop in spending by cash-strapped consumers will cut into profits next year.
Shares in Associated British Foods fell by more than 7 per cent yesterday after it warned that profit margins on sales at Primark will fall well below what has been the norm in recent years. Although the chain expects to increase revenues on the back of new store openings, it is struggling against higher energy costs, a weakened pound, and the cost-of-living crisis.
In a bid to protect sales volumes as much as possible, Primark said it will not raise prices “beyond those already actioned and planned”. The company announced in April that some autumn and winter stock would be adjusted upwards from August, with further increases scheduled for spring and summer lines next year.
“To mitigate these [cost] pressures, in addition to the price increases mentioned above, there are also plans to improve store labour efficiency and deliver lower operating costs,” AB Foods said in a trading update.
The decline in retail earnings is expected to more than offset an anticipated bounce from the group’s sugar, groceries, agriculture and ingredients businesses. The board of directors will consider in November whether the group has sufficient cash and capital for a return to shareholders.
READ MORE: Primark warns on price hikes
Russ Mould, investment director at AJ Bell, said profit margins in the new financial year that begins later this month will be “well below” the 10%-plus figure that has been the norm at Primark excluding those years affected by the Covid pandemic.
“Primark now believes it will generate a return on sales which is lower than the 8% it expects to make in the second half of the year to September,” he said. "That figure is itself a big step down from the 11.6% achieved in the first half of this financial year, from October to March, and below the company’s historic average.”
In addition to higher costs and reduced demand, Primark’s finances will also take a hit from the strength of the US dollar again the pound and the euro, which has made it more expensive to purchase some of its goods.
Commenting on its results for the current year, which will be published on November 8, AB Foods said Primark benefitted from higher revenues in the UK following the end of Covid-related restrictions that forced the closure of “non-essential” retail shops. Total sales in the US during the fourth quarter are expected to be 27% up on pre-Covid levels.
However, Primark experienced a sharp drop in continental Europe, where sales have been weaker than expected.
READ MORE: Primark issues statement on raising prices amid soaring costs
Overall retail sales are expected to come in 40% higher at approximately £7.7 billion, with like-for-like sales in the UK during the fourth quarter “just below” pre-Covid levels three years ago. However, sales in continental Europe during the same period were down by 18%.
“Across these markets footfall failed to improve in the fourth quarter,” the group said. “This was driven by different factors in each market but recently we have seen some signs of customer caution relating to their spend in all markets.”
Group revenues and operating profits will be “significantly ahead”, boosted by Primark’s emergence from lockdown restrictions and a strong performance by the dominant food division. The sugar business in particular is expected to be substantially ahead of last year.
“European sugar prices moved much higher this year,” AB Foods said.
“Looking ahead we expect European sugar demand to remain in excess of production in our next financial year. These stronger prices have been supported by higher world market sugar prices.”
Primark, which does not have an online shopping service, is on track to launch a UK trial of its click-and-collect service in the run-up to Christmas. Its new UK website has been live since April, offering a stock-checker facility that the company said has been “enthusiastically adopted”.
Shares in Primark closed yesterday's trading 110p lower at 1,345p.
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