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RBC Capital upgrades AB Foods, sees improvement for Primark LFL sales
Associated British Foods was on the rise on Monday after RBC Capital Markets lifted the stock to 'outperform' from 'sector perform' and bumped the price target up to 3,100p from 2,800p, citing potential for Primark's like-for-like sales to improve.
"We see margin upside driven by better buying and inventory control and we think concerns over performance in the US have been overdone," the bank said.
RBC said Primark's LFL sales should return to positive territory in the second half of this year and FY19 thanks to an ongoing strong product offering and less competition from the likes of New Look, Pep & Co and Lefties.
"We think this should reassure investors who have been concerned about sluggish LFL sales trends and its lack of a transactional online offer."
RBC noted that Primark's entry into the US in 2015 created a lot of excitement but said performance was affected by a lack of brand recognition and as it has taken time to adapt its offer for the US market.
"We think Primark has settled on the right sort of format now as a mid-sized box and its next opening in Brooklyn, New York, should be an important milestone for the brand there. We think ABF is committed to US expansion for Primark and that its sales densities should improve as it gains brand scale there."
In addition, the bank argued that Primark should benefit from dollar buying gains in the second half of this year first half of 2019, strong inventory control and strong volume growth which increases its bargaining power with suppliers.
At 0940 BST, the shares were up 1.3% to 2,771p.