Primark has “potential for strong margin recovery” according to the Royal Bank of Canada (TSX:RY), with the broker raising Associated British Foods (ABF) target price.
Analysts at the bank inched the target price to 2300p from 2250p.
The broker said it maintained its “positive stance” on ABF and its largest player, Primark.
ABF’s retail arm has the potential for a strong recovery in the 2024 financial year, driven by lower freight costs.
RBC added that Primark also continues to be cheaper than its competitors, with that gap rising this year so far.
Primark has also seen lower transactions but higher transaction value, suggesting people are spending more, albeit the price makes some difference, RBC said.
However, sales are expected to fade in the third quarter compared to the first half due to unfavourable weather, with Primark sensitive to weather conditions.
Commenting on Primark, the broker believes that new stores are rolling out and generating sales densities with “little cannibalisation” due to the retailer having less share in markets outside of the UK and Ireland.
Primark’s click & collect trial is also being extended to 32 stores which are “broadly within” the M25 region (London).
In grocery, margins are stabilising, while ingredients appear to be benefitting from less competition, the broker said.
Profitability in sugar, however, is affected by lower British volumes and increased costs, but profits should be helped by firmer pricing.