Primark owner AB Foods eyes growth as costs ease

Associated British Foods PLC (ABF.L) said its discount fashion chain Primark enjoyed a strong Christmas and forecast profit growth as falling raw materials prices help margins recover and ease the pain for cash-strapped Britons.

The Bank of England is hoping slower price rises will bring inflation back on target, giving consumers some respite after a period of falling real wages, and in turn giving anaemic economic growth a shot in the arm.

"I do share their (the BoE's) optimism," AB Foods Finance Director John Bason told Reuters on Thursday. "I think that the pressures of 2011 were VAT increases, but also the background of rising commodity prices .... They turned towards the end of 2011, so I think the inflationary pressure really has eased."

British gas and electricity providers have announced price cuts in recent days which, combined with steady VAT sales tax rates over the last year, mean inflation rates are expected to drop sharply in the coming months.

Bason stressed, however, that 2012 would not be easy, and with unemployment at a 17 year high, the prospect of lower household bills was among the few bright spots on the horizon.

"Economic uncertainty, particularly in the euro zone, and continued pressure on consumer disposable incomes are expected to remain key features of this financial year," the company said in a trading update. "Input commodity costs are subsiding, which will now start to benefit the group."

British consumer morale in December sank to its second lowest level in seven years, a survey showed on Thursday, and many retailers are struggling.

Primark rival Peacocks said on Wednesday that it had called in administrators and is up for sale after succumbing to falling sales and high debts, while electrical goods retailer Kesa on Thursday reported a slump in sales at its Comet business in the UK.

COTTON DOWN, SUGAR UP

London-based AB Foods, which sells Silver Spoon sugar and Twinings tea, said group-wide revenue rose 12 percent in the 16 weeks to January 7, with sales at Primark up 16 percent. It described underlying sales growth at stores open for more than a year as good.

"As always, the update is rather vague, with only limited figures," Bernstein analyst Andrew Wood wrote in a note to clients. "We would expect the market to react positively to the sales figure ... although continued caution on margins and earnings, particularly for H1, is likely to limit the enthusiasm."

Shares in AB Foods were down 0.2 percent at 1,135 pence 0840 GMT, broadly in line with a slightly weaker FTSE 100 index .FTSE.

Higher cotton costs meant operating margins at Primark fell during the first quarter of its business year but the company noted cotton prices had fallen from highs hit last year and predicted it would start to see the benefits in the second half.

"Cotton has halved from the peak last year, so what was a headwind has become a tailwind here," Bason said.

As one of the world's largest sugar producers, AB Foods is also benefiting from strong, relatively resilient, sugar prices, helping lift revenues at its sugar division by 21 percent.

For the group as a whole, AB Foods said it expected growth in both sales and adjusted operating profit in the coming year, with profit improvement weighted towards the second half.

"The underlying message reads that the group is trading well, and we suggest current year forecasts are well under-pinned," Credit Suisse analysts wrote in a research note.

"We are not changing our estimates at this stage ... But trading thus far strongly underpins our numbers. Primark margins in H2 (we have a very modest uptick) remains the biggest question."

(Editing by Lorraine Turner and Will Waterman)