By Emma Thomasson
FRANKFURT (Reuters) - Associated British Foods (LSE:ABF) plans to increase the expansion pace of its Primark discount chain, upping pressure on the world's two biggest fashion retailers, Inditex (MCE:ITX) and H&M (STO:HM B), in their top markets in Europe.
Primark will add a million square feet of selling space in the coming year, mostly in Britain, Spain, Germany, France and the Netherlands, after growing 0.8 million in the financial year to September 14, to a total of 9 million or 257 stores.
"We're really at the very early days of expansion in continental Europe," Chief Executive George Weston told Reuters in a telephone interview, noting there were only 10 Primark stores in Germany - H&M's biggest market - to 161 in the UK.
"One day we will have a hundred or more," he added, noting that Primark will open its first store in France in December, one of 13 openings it is planning in time for Christmas, including five in Inditex's home market of Spain.
Primark, which opened its first store in Dublin in 1969 under the name Penneys and launched in Britain in 1973, is focusing on growing existing markets for now, but is looking at other countries in the medium-term. Weston noted it was still not present in Scandinavia, eastern Europe and Italy.
"We're being invited into more shopping centres in continental Europe. We drive tremendous footfall," he said.
Primark, which generates almost a third of AB Foods' group sales, has performed strongly through the economic downturn thanks to its low prices and quick adoption of fashion trends.
Those low prices came under scrutiny in April after 1,129 people died in the collapse of a factory in Bangladesh, where clothes were made for brands including Primark. Last month Primark laid out plans to pay more compensation for the disaster.
Weston dismissed suggestions that Primark success was dependent on hard times, noting it also grew strongly before the financial crisis. He said it was now shifting its offering towards high fashion from discount basics as spending power recovers.
British retail sales grew slightly more strongly in October compared to the previous month, but mild weather resulted in lower clothing sales which limited overall gains, the British Retail Consortium said earlier on Tuesday.
Primark reported full-year adjusted operating profit rose 44 percent on revenue up 22 percent to 4.2 billion pounds, helping AB Foods grow adjusted pretax profit rose by 13 percent to 1.096 billion pounds on revenues of 13.3 billion.
AB Foods said it expected Primark's continued growth, along with expansion in its grocery business, to boost profits in those divisions next year. However it forecast another fall in profit at its AB Sugar business as European sugar prices drop.
Overall, the group said it expected adjusted earnings per share for the coming year to be similar to 2013.
The cautious outlook hit shares in the group, which have risen by a quarter since a bullish trading statement in September. They were down 3.1 percent by 0900 GMT.
Primark shares, 55 percent owned by the family of CEO Weston, trade at 22 times expected earnings, compared to 23 times for H&M and 26 times for Inditex.
"While Primark is likely to continue with its success, ABF is still a 'conglomerate' such that buying the strength of Primark also means buying the weakness of other businesses," Bernstein analyst Andrew Wood said in a note.
AB Foods said it had made progress to improve the efficiency of its sugar business as the planned ending of European Union sugar quotas in 2017 puts more pressure on prices, already down due to expectations of a fourth year of oversupply.
"Sugar prices have further to fall," Weston said, without giving a concrete forecast.
AB Foods reported improved performance for its grocery unit, which includes Silver Spoon sugar, Twinings tea and Ryvita biscuits and recorded a 24 percent increase in adjusted operating profit as restructuring bore fruit.
(Editing by Sophie Walker)