Penneys owner warns of 'substantial' cost inflation but will not increase prices further

Higher energy, raw materials and labour costs will dent the company's profit margin

Penneys has decided to limit further price increases in 2022-23 beyond those already planned.

Penneys owner Associated British Foods faces "substantial and volatile" input cost inflation that will hit results in its new financial year, it said on Tuesday, taking the shine off a 42% jump in 2021-22 profit.

AB Foods, which also owns sugar, grocery, ingredients and agricultural businesses, reiterated a September forecast that profit would fall in fiscal 2022-23.

But its shares rose 5% in morning trading, paring losses this year to 25%, as investors took comfort from plans for a £500m (€574m) share buyback programme and an 8% increase in the group's total dividend.

AB Foods said in September that Penneys who trade as Primark outside Ireland had taken a commercial decision to limit further price increases in 2022-23 beyond those already planned, seeking to maintain its value credentials among consumers.

"We have decided to hold prices for the new financial year at the levels already implemented and planned and to stand by our customers, rather than set pricing against these highly volatile input costs and exchange rates," said Chief Executive George Weston.

That decision, combined with higher energy, raw materials and labour costs as well as dollar strength that reduces its purchasing power, will dent Primark's profit margin, the group said.

Weston told Reuters there was little point raising prices when consumers were short of cash, adding Primark could expand its market share if rivals took an alternative approach.

He said Primark shoppers were generally being cautious on spending and budgeting more.

"People are buying essentials when they need them, not in anticipation of needing them," he said.

AB Foods reported adjusted operating profit of £1.44bn (€1.65bn) for the year ended September 17, up from £1.01bn (€1.16bn) in 2020-21, mainly reflecting higher Primark sales after the end of Covid-related restrictions.

The group expects 2022-23 profit in its grocery business, which includes Twinings tea, Jordans cereals, Kingsmill bread and Ovaltine drinks, to be broadly in line with 2021-22.

Profit in the sugar business is expected to be well ahead of 2021-22.