AB Foods warns of flat earnings, but Primark stars

* Heavy investment to wipe out expected operating profit rise

* Sees flat earnings per share in current year

* Annual pretax profit 632 mln pounds vs 628 mln forecast

* Primark like-for-like sales up 4 pct

(Adds further details, updates shares)

By David Jones

LONDON (Reuters) - Discount fashion clothes chain Primark defied the UK downturn with better than expected annual sales, but owner Associated British Foods (ABF.L: 行情) warned of flat earnings this year helping to push its shares down.

The London-based food and retail group said heavy investment to open another 10 to 12 Primark stores this year and behind sugar projects in China and Africa would wipe out an expected operating profit rise this year due to a bigger interest bill.

"We have seen a squeeze on consumer spending for a while and although it could get worse we are very well placed and will continue to invest," said Chief Executive George Weston in an interview after full-year results on Tuesday.

AB Foods shares rose 2.4 percent to 724-1/2 pence reflecting the strong sales at Primark, but later drifted lower on further consideration of the earnings warning to trade off 2.3 percent at 691 pence by 1315 GMT within a firmer FTSE 100 index .FTSE.

The group posted a 3 percent rise in annual profit with Primark again the star performer. The chain saw profits up 17 percent on sales ahead 21 percent which came from more store openings and like-for-like growth of 4 percent, in what Weston described as a "normal sort of year."

He added that Primark had traded well in the seven weeks since its year-end of Sept. 13.

"Trading is well in line with where we have been. Our autumn ranges are good, so it's so far so good," Weston said.

Analysts saw the Primark results as positive put against a background of shoppers cutting back on spending in the downturn as they are attracted by rock-bottom prices and perceived value.

Primark, which accounts for nearly a third of group profit and has 181 stores in Britain, Ireland and Spain, has outperformed bigger groups such as Marks and Spencer (M&S) (MKS.L: 行情) and most other major UK clothes retailers.

M&S, also reporting on Tuesday, showed UK like-for-like sales down 5.7 percent in the six months to end-September with pretax profits off 34 percent. [nL3688812]

At AB Foods, 55 percent owned by the family of Chief Executive Weston, adjusted pretax profit rose to 632 million pounds ($1 billion) in the year to Sept. 13, compared with a consensus forecast of 628 million pounds and a range of 621 to 637 million. Earnings per share rose 4 percent to 54.9p.

"An unexpected beat on Primark's like-for-likes but disappointment on the margin. Elsewhere few surprises. Consensus 2009 numbers may give up a little ground," said analyst Jeff Stent at brokers Citi.

Analysts had expected Primark to show like-for-like growth of 3 percent and flat margin, but sales were up 4 percent after a very strong end to the year while profit margins slipped.

Analyst Charlie Mills at broker Credit Suisse said he was revising his earnings numbers for the current year to September 2009 down to 55.5 pence a share from 56.5p previously.