Jul 14, 2011
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Overseas demand bails out struggling UK retailers

Jul 14, 2011

LONDON | Thu Jul 14, 2011 - Overseas growth and market share gains are helping some British retailers to cope with rising raw material costs and sluggish consumer spending at home, updates from chains including Primark, Mothercare and ASOS showed on Thursday.

Discount clothing chain Primark said it had managed to combine the two, reporting a pick up in sales growth in its fiscal third-quarter at a time when most rivals are struggling to grow at all.

Online fashion retailer ASOS (ASOS.L) and baby goods group Mothercare (MTC.L) both highlighted strong sales abroad in the face of a weaker British market, while Sports Direct (SPD.L) showed it benefiting from problems at rival JJB (JJB.L) to boost profits.

UK-focused retailers are having a torrid time as shoppers are squeezed by rising prices, subdued wages growth and a government austerity drive. A survey on Tuesday showed sales at British stores open over a year fell 0.6 percent year-on-year in June following a 2.1 percent drop in May.

Clothing chains have faced extra pressure from a jump in the price of raw materials such as cotton and rising wages in China, where many of them produce their garments.

Primark, which is owned by Associated British Foods (ABF.L), has responded by absorbing most of the cost increases, taking a hit to profit margins in order to protect its low-price credentials with struggling shoppers.

The move has been painful. AB Foods cut its full-year earnings guidance in April.

But Finance Director John Bason told Reuters a pick up in third-quarter sales growth showed the strategy was right.


"Our numbers speak for themselves ... Primark has built up huge trust with its consumer base. We're not going to throw that away for the sake of one cotton price shock," he said, adding an easing in cotton prices since March should allow margins to recover in the second-half of fiscal 2011-12.

Primark said sales rose 13 percent in the 40 weeks to June 25 and were up 15 percent in the last 16 weeks of the period, boosted by growth in overseas markets like Germany and Spain.

Bason signaled sales at stores open over a year had continued to rise at around the first-half rate of 3 percent, including increases in Britain and Ireland.

"Pretty robust in the current climate," Credit Suisse analyst Charlie Mills said of Primark's performance, raising his target price on AB Foods shares to 1,180 pence from 1,060.

Marks & Spencer (MKS.L), Britain's biggest clothing retailer, on Wednesday reported flat underlying sales at its non-food business.

At 0810 GMT, AB Foods shares were up 5.7 percent at 1,117 pence, the top rise among European blue-chip stocks .FTEU3.

AB Foods, which also markets Silver Spoon sugar, Mazola vegetable oil, Ovaltine drinks and Twining teas, said its grocery arm was also benefiting from growth abroad, offsetting weakness in Britain which led to a profit warning last month from UK-focused Premier Foods (PFD.L).


ASOS reported a 69 percent rise in first-quarter sales to 104.2 million pounds ($167 million, continuing its rapid growth as a growing number of shoppers switch to the internet.

But the group, which targets 16 to 34-year-old women looking to emulate the designer looks of celebrities like Kate Moss, Sienna Miller and Alexa Chung at a fraction of the price, is seeing a change in the composition of that growth.

While international sales soared 160 percent to account for over half of the total, UK sales growth slowed to 15 percent.

Mothercare reported similarly contrasting fortunes for its fiscal first quarter, with international sales up 15.2 percent, but UK like-for-like sales down 4.3 percent.

Sports Direct, Britain's biggest sporting goods retailer, posted a 25 percent rise in annual earnings as it grabbed market share from stricken rival JJB Sports.

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