UPDATE 2-AB Foods relies on a more profitable Primark as sugar slumps
* Primark constant-currency sales up 12 pct, sugar down 27 pct
* Primark resisted trend for heavy pre-Christmas discounting
* Primark boosts target for new space to 1.1 mln sq ft
* AB Foods reiterates group outlook for steady adjusted EPS
BERLIN, Jan 16 (Reuters) - Associated British Foods expects improved profitability at its Primark discount fashion chain to offset a weaker than expected performance at its sugar unit this year.
The company's trading update on Thursday said that a strong Christmas helped Primark to a better than expected profit margin in the 16 weeks to Jan. 4, with the chain resisting pressure to discount stock after an unusually warm September and October delayed sales of winter clothing.
British high street stores offered their biggest pre-Christmas discounts in at least seven years last month, industry figures show, with aggressive price cuts from retailers such as Debenhams and Marks & Spencer.
"Credit to the Primark team. They got it right both in terms of volumes and what people wanted," AB Foods Finance Director John Bason told Reuters. "We didn't have a particularly cold autumn or winter, but autumn/winter sold through."
The company said that group revenue was flat for the 16-week period, compared with 9 percent growth for the year to Sept. 14, with Primark's constant-currency growth of 12 percent helping to counter a fall of 27 percent for sugar.
Primark has performed strongly through the economic downturn thanks to its low prices and quick adoption of fashion trends.
It reported a full-year operating margin of 12 percent in 2012/13, up from 10.2 percent on the previous year, helped by lower cotton prices and markdowns. That compared with 6.8 percent at M&S and 7.4 percent at Debenhams, Thomson Reuters data shows.
AB Foods reiterated its guidance for 2013/14, saying that the group's adjusted earnings per share should be similar to the previous year's.
Profit at Primark, which generates almost a third of group sales, should be well ahead of last year, with a higher margin than expected, but a recent drop in world sugar prices will hit profit from the sugar unit.
Primark is expanding fast in continental Europe, most recently encroaching on the French territory of the world's top two fashion retailers, Inditex and H&M. It plans more stores this year in France, Germany and Spain.
AB Foods increased the forecast for net new selling space at Primark this year to 1.1 million square feet from 1 million sq ft. It added 0.8 million sq ft in the 2012/13 financial year for a total of 9 million sq ft across 257 stores.
The sugar unit was hurt by lower European Union sugar prices, which the group expects to hit revenue and margins in Britain and Spain in the full year.
Bason said such low prices were not sustainable but declined to give a forecast for the market. "The Brazil industry will find this level of prices extremely difficult and something will happen as a result of this. This is not a normal level and will cause some distress," he said.
Sales it the grocery unit, which includes Silver Spoon sugar, Twinings tea and Ryvita biscuits, fell 1 percent, largely as a result of a weaker Australian dollar, though profitability improved at the Australian business.
Shares in AB Foods were down 3.9 percent at 0959 GMT, against a 0.7 decline for the European retail sector.