Value fashion powerhouse Primark sounded a warning that shoppers have been reluctant to open their purses since the start of the year, knocking City sentiment towards retailers.

The retailer’s owner Associated British Foods (ABF) said in a pre-close update ahead of interim results in April that Primark’s trading in the first three months of its financial year was “strong” despite the bad weather before Christmas.

However, since the new year, “there has been a noticeable slowing down of UK consumer demand”. Primark’s sales will be 11% ahead of last year and like-for-likes up 3%.

ABF said: “Operating margin in the first half will be lower than last year reflecting the increase in VAT in the UK and the impact on input costs arising from higher cotton prices, which continue to rise. As previously highlighted, margins will remain under pressure in the second half.”

Broker Panmure Gordon cut its full-year like-for-like growth assumption for Primark from 3% to 2% and reduced its EBITA forecast by £6m to £348m, implying a 90-basis point margin fall to 10.6%.

Analysts at Jefferies said: “Our assumption was that the impact of the VAT increase and higher cotton prices would only fully impact Primark by the second half, but this has occurred earlier than expected.”

Brokers drew wider significance from the performance. Shore Capital observed: “We went into this update concerned about trading momentum on the high street, reflected in recent commentary from the CBI and, indeed, at the higher end of the retail spending spectrum, from John Lewis. Accordingly, Primark has also confirmed a subdued start to 2011 from the retail trade.”

Ahead of Primark’s downbeat update, brokers had been warning on the outlook for the stores sector. Last week Seymour Pierce cautioned: “Along with consensus, we expect the first half of 2011 to be tough and for the second half to be relatively better, but with rising interest rates on the horizon it is difficult to see the sector performing short term unless corporate activity picks up.”

The broker said prospects look especially difficult for clothing retailers. “Sourcing cost inflation, plus VAT increase, means retailers are protecting margin by increasing prices by 5% to 8% but they have no idea what will happen to volumes.”

Numis noted: “We are firmly of the view that 2011 is going to be a tough year. The pincer movement of tax increases and imported inflation will come at retailers from both sides, simultaneously impacting both demand and input costs.”