Penneys owner under pressure from inflation and weak sterling

Profit is under pressure at Penneys and its sister brand Primark as the retailer struggles with a weaker pound and the effort to keep clothing cheap for cash-strapped shoppers.

The fast fashion firm’s margin shrank to 8.3 per cent in the first half from nearly 12 per cent a year earlier, owner Associated British Foods said on Tuesday. AB Foods, a conglomerate which owns a range of businesses from grocery to agriculture, said full-year profit in its sugar business is also likely to decline as a result of much lower production in the UK.

The company’s shares fell 3.6 per cent in early trading in London.

The fast-fashion retailer is pulling in more shoppers as higher living costs drives consumers to save money on £8 (€10) mini dresses and £20 jackets. Still, AB Foods is struggling with the impact of inflation, an elevated wage bill and high commodity costs. A weaker sterling is also a factor for a business that buys in US dollars.

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“In Primark, our exchange rates we’re buying clothes with now are weaker than this time last year,” AB Foods chief executive officer, George Weston, said. “That’s still a drag.”

The group is still confident about the future of Primark and is extending a click and collect trial across London later this year, allowing customers to buy kidswear and nursery items online and collect from 32 stores in the capital this summer. The move comes as the retailer’s sales rose 19 per cent in the first half.

Stronger fashion sales are partly due to “hard-pressed families” looking for value, while Primark is also benefiting from the demise of Debenhams and Arcadia brands such as Topshop, said Mr Weston.

“We’re attracting people that might have shopped in places that are no longer trading,” he said. “The destruction of others on the high street is helping us.”

The retailer started the click-and-collect trial for its website late last year in the northwest of England, Yorkshire and north Wales. It was the first time that customers could buy from the company online. Primark struggled during Covid lockdowns because stores were forced to close for months and the business had no ecommerce site to fall back on.

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The trial has been encouraging so far with people buying a good number of items when using click and collect with return rates lower than expected, said Mr Weston.

Primark is also growing its footprint in southern United States, particularly in Texas, with a new warehouse in Florida.

For the broader AB Foods business, full-year profit for the group is still expected to be in line with last year even though the sugar division is weaker. AB Foods is sourcing sugar for customers from overseas markets after bad weather impacted production with flooded crops in Mozambique. Sugar production in the UK is also low this year.

“That comes as a significant cost to our margins but we’ll find the sugar,” said Mr Weston. – Bloomberg