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Primark owner AB Foods warns of 'substantial' cost inflation

FILE PHOTO: The retail store Primark in Birmingham, Britain reopens its doors after a third lockdown imposed in early January due to the ongoing coronavirus disease (COVID-19) pandemic

By James Davey

LONDON (Reuters) -Primark 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 its 2022-23 financial year.

But its shares rose 4.3% in morning trading, paring losses this year to 26%, as investors took comfort from plans for a 500 million pound ($573 million) share buyback programme and an 8% increase in the group's total dividend.

AB Foods said in September that Primark 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 that 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, noting that Primark was still trading better in the UK than continental Europe.

The group booked a 206 million pound writedown for Primark's German business, which it is looking to reposition. While options include both reducing the size of and closing some stores, Weston said Primark is committed to Germany.

AB Foods reported adjusted operating profit of 1.44 billion pounds ($1.65 billion) for the year ended Sept. 17, up from 1.01 billion pounds 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 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.

($1 = 0.8705 pounds)

(Reporting by James DaveyEditing by David Goodman and Mark Potter)