Value fashion giant Primark improved operating margins from 10.9% to 12.5% last year but has warned that they may shrink again as cotton prices soar.

The retailer’s total sales increased 18% in the period to September 18, helped by expansion in continental Europe, particularly Spain. Like-for-likes rose by 6% and were especially strong in the UK, which, with more than 70% of the group’s total retail space, remains Primark’s most important market.

John Bason, finance director of Primark-parent Associated British Foods, said that Primark had used its operational scale to drive efficiencies and improve margin, but that next year’s increases in the cost of raw cotton and freight would eat away at some of the gains.

He would not estimate how much margin would be eroded, or go into detail about Primark’s pricing strategy, but indicated the retailer would try to avoid passing price hikes on to consumers.

“Cotton is the biggest headwind but Primark is going to remain the best value on the high street, absolutely - that’s what Primark is about. [The fact we are able to do this] is a demonstration of the benefits of volume growth Primark is enjoying,” he said.

Cotton prices have risen by more than 80% since July. Panmure Gordon analyst Graham Jones said: “Given the sharp rise in cotton costs, the rise in VAT and Primark’s commitment to remaining the price leader, we cautiously forecast an 80 basis point squeeze in EBITA margins in 2001 to 11.7%.”

Womenswear was Primark’s strongest-performing category in the UK but Bason said childrenswear and menswear were “really strong” in Spain, where three new Primark stores opened during the year.

In total, 13 new stores were opened over the period, including Primark’s first store in Belgium in Liege, one each in Portugal and Germany and seven in the UK. The openings bring Primark’s total store count to 204.

Bason also attributed Primark’s strong trading to investment in storefits. Primark is still refurbishing eight of the 10 Bhs stores it acquired from Arcadia in January. Bason said it would be interested in taking on additional Bhs stores, although it is not in talks to do so.

Bason said Primark had not suffered much from reduced manufacturing capacity in China, but that it was balancing its sourcing between Bangladesh and India, and Turkey and Eastern Europe to strike the right balance between reducing costs and speed to market.

ABF reported revenue up 10% to £10.2bn, and adjusted pre-tax profit up 26% to £825m.