Price cuts hit margins at Penneys owner

The owner of the discount fashion chain Penneys today said it was having to discount more than expected as it battles the harsh consumer climate.

Associated British Foods, which also owns Primark, Twinings, Ovaltine and Kingsmill, said the budget retailer’s like-for-like sales rose by 3% in the year to September 17 but that it needed a higher than normal level of price cuts to get customers spending. This will hit operating margins by more than anticipated.

Overall, sales at Primark continued to grow and are expected to be up 13% for the year when including new stores. The group’s latest store, a 46,000 sq ft shop adjacent to the London Olympics site, opens tomorrow.

The group opened stores in Scunthorpe, Ilford, Kings Lynn and Stockport during the past six months and with the new Westfield store will have 223 stores in the UK and Europe.

Primark warned earlier in the year about soaring cotton prices, but these have softened recently, which will be reflected in lower input costs in 2012.

Elsewhere, sugar and agriculture revenues are ahead of the previous year, while the UK grocery arm and tea and drinks business Twinings Ovaltine both did well.

However, bakery division Kingsmill only partially recovered higher wheat costs, while foods distributor Westmill was hit by a slowdown in the Chinese and Indian restaurant trade.

The group said operating profits over the second half met its previous expectations despite the pressure on Primark, with underlying earnings to be close to last year due to a lower tax rate and despite there being a week less trading.

James Dawson, an analyst at broker Charles Stanley, added that a good performance from sugar helped offset some of the weaker results elsewhere, but with pressure continuing on margins there is a risk forecasts could be lowered.