UPDATE 2-AB Foods warns cotton will hit Primark margins

* Warns higher cotton prices will lower Primark margins
* Highlights uncertain global outlook, tax rises in Europe
* In talks to raise bread prices after wheat cost rises
* Full year dividend up 13 percent at 23.8 pence
* Shares fall 0.8 percent

LONDON, Nov 9 - Primark owner Associated British Foods warned the sharp hike in cotton prices will hit margins at its discount fashion chain as it beat forecasts with a 25 percent rise in full-year earnings.

Chief Executive George Weston said on Tuesday that Primark will not surrender its price leadership status in clothing and will take a hit to its profit margin to soften the blow for its customers from the recent doubling in cotton prices.

"We will remain the price leader, there is no doubt that we will not surrender this position. We don't expect the cotton price to affect sales growth but it will affect the margin in the short term," Weston told a annual results briefing.

Primark's 204 stores showed a rise in operating margins to 12.5 percent in the year to mid-September from 10.9 percent previously, and Weston expects the margin in the current year to drift back down between these two figures.

Analyst Graham Jones at house broker Panmure Gordon is looking for a 80 basis point margin squeeze to 11.7 percent.

The London-based group which markets Silver Spoon sugar, Twinings tea and Ovaltine drinks also warned about rising wheat prices, the uncertainty about the global economic outlook and the impact of Value Added Tax rises in Europe.

This prompted a cautious outlook, as the group only said it expects to see revenue and profit growth in the current year but gave no indication of the size of any increase.

The group, 55 percent owned by the family of Chief Executive Weston, posted adjusted earnings of 72.2 pence a share for the year to Sept. 18 beating a consensus forecast of 70p from Thomson Reuters I/B/E/S and compared to last year's 56.1p.

It raised the full year dividend by 13 percent to 23.8 pence a share.

Group profits were driven by continued growth at Primark, strong sugar performances in the UK and China and cost savings at Twinings, but this year higher cotton and freight costs will hit Primark and high wheat costs its breadmaking business.

AB Foods shares were off 0.8 percent at 10.65 pounds by 0830 GMT in a slightly firmer London market.

The shares have outperformed the FTSE by 23 percent so far this year but since early September they have underperformed as worries over slowing growth and margin pressure at its discount fashion chain Primark emerged.

Britain's biggest clothing retailer Marks & Spencer reported a 17 percent in half-year pretax profits and said it would step up its investment in its core UK business, online and overseas.

source:Reuters