Cotton costs will our hit margins, warns Primark

Primark expects the soaring price of cotton to "erode" some of the uplift in profit margins the discount fashion retailer delivered in its last financial year.

The comments by the retailer's owner, Associated British Foods (ABF) – which also operates the Patak's curry pastes, Kingsmill bread and Ryvita snack brands – took the gloss off a stellar performance by Primark for the 53 weeks to 18 September.

Primark's adjusted profits jumped by 35 per cent to £341m, as total sales rose 18 per cent to £2.73bn over the period. The fashion retailer, which has 204 stores, delivered a 6 per cent rise in underlying sales on stores open at least one year, boosted by a barnstorming performance in Spain and further growth in the UK.

Primark's operating margin jumped to 12.5 per cent from 10.9 per cent, but the company said it expects some of this margin improvement to be "eroded in the coming financial year due to higher cotton prices and freight costs", as well as increases in VAT.

Adjusted pre-tax profits at ABF, which also owns the Twinings tea brand, rose by 26 per cent to £825m, driven by Primark and by a buoyant performance from its sugar division in the UK and China.

While ABF also warned on the "significant increase" in commodity prices, particularly on wheat, the group said: "The diversity of the group's operations and its broad geographic spread, together with further returns from our capital investments, serve to mitigate these pressures."