Primark’s operating margin is expected to take a hit over the full year following a higher level of discounting on the UK high street towards the end of the summer.
The retailer had warned at its interim results that operating margins would suffer because of higher input prices and its decision to absorb the VAT rise, but a price-cutting frenzy across retail generally means it will drop further.
Parent Associated British Foods (ABF) said Primark’s sales were expected to rise 13% compared with last year, driven by new selling space and like-for-like growth.
In the first half, Primark’s like-for-likes rose 3% and the same figure is expected for the full year ending on September 17. The retailer opened 19 stores throughout the year.
Growth was driven by Primark’s European business. Growth is also expected in the UK and Ireland despite weak consumer demand in the second half.
Although the recent fall of cotton prices is likely to bolster Primark’s margin in 2012, Jeffries equity analyst Dirk Van Vlaanderen has concerns about the medium term.
He said: “The high operational leverage to volume growth in the business combined with a weak UK consumer means that margins could stay depressed medium term.”
However, Shore Capital forecast Primark’s margin to edge up to 10.2% next year, from 9.9% predicted this year, and expects EBIT to grow to £350m. ABF will reveal its full year results on November 8.