Rising costs could mean job losses at the popular cheap clothing chain Primark over the course of this year.

The company has issued a warning profit margins on sales will be significantly lower than previous years as customers cut back on their own spending.

Shares of Associated British Foods, which owns Primark, have already dropped by more than seven percent.

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The chain is battling higher energy costs, a weaker pound, and the cost-of-living crisis even though it anticipates higher revenues as a result of new store openings.

In a bid to protect sales volumes as much as possible, Primark said it will not raise prices “beyond those already actioned and planned”.

The company announced in April the prices of some of its autumn and winter stock would increase from August, with further increases scheduled for spring and summer lines next year.

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In a trading update, AB Foods said: “To mitigate these cost pressures, in addition to the price increases mentioned above, there are also plans to improve store labour efficiency and deliver lower operating costs.”

The drop in retail earnings is expected to outweigh the expected increase in earnings from the group’s sugar, groceries, agriculture, and ingredients businesses.

In November, the board of directors will consider whether the company has enough cash and capital to return to shareholders.

Profit margins in the new fiscal year, which begins later this month, will be “well below” the 10 percent-plus figure that has been the norm at Primark, excluding years affected by the Covid pandemic, according to Russ Mould, investment director at AJ Bell.

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He said: “Primark now believes it will generate a return on sales which is lower than the 8 percent it expects to make in the second half of the year to September.

“That figure is itself a big step down from the 11.6% achieved in the first half of this financial year, from October to March, and below the company’s historical average.”

In addition to higher costs and reduced demand, Primark’s finances will also take a hit from the strength of the US dollar again the pound and the euro, which has made it more expensive to purchase some of its goods.

AB Foods said Primark benefited from higher revenues in the UK following the end of Covid-related restrictions that forced the closure of “non-essential” retail shops in its results for the current year, which will be published on November 8.

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Total sales in the United States are expected to be 27 percent higher than pre-Covid levels in the fourth quarter.

Primark, on the other hand, saw a significant drop in continental Europe, where sales were lower than expected.

Overall retail sales are expected to be 40 percent higher at around £7.7 billion, with fourth-quarter like-for-like sales in the UK “just below” pre-Covid levels three years ago. However, sales in continental Europe fell by 18 percent during the same time period.

“Across these markets footfall failed to improve in the fourth quarter,” the group said. “This was driven by different factors in each market but recently we have seen some signs of customer caution relating to their spend in all markets.”

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Group revenues and operating profits will be “significantly ahead”, boosted by Primark’s emergence from Restriction measures and a strong performance by the dominant food division The sugar industry, in particular, is expected to outperform last year.

Primark, which does not have an online shopping service, is planning to launch a click-and-collect service in the United Kingdom in the run-up to Christmas.

Its new UK website has been live since April, with a stock-checker feature that has been “enthusiastically adopted,” according to the company.

Source: The Herald

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