RBC sees muted outlook for European retail amid weak spending trends

Investing.com -- RBC Capital Markets said European retail faces a muted outlook as households cut back on spending, with weak sales momentum likely to offset favorable margin conditions.

In a report dated Monday, the bank said its latest pricing survey for the UK apparel sector showed broadly stable pricing, with Marks & Spencer, Zalando and H&M becoming more competitive year over year. 

At the lower end, Shein gained ground against Primark, while online fast-fashion retailer PrettyLittleThing became more expensive. 

RBC noted, however, that these shifts in relative pricing are unlikely to counter the drag from consumer concerns about household cash flow, higher taxes and the cost of living.

RBC said the gross margin outlook for apparel retailers remains favorable, citing a 5% year-on-year weakening of the U.S. dollar against the euro and the pound in the second quarter. 

The brokerage expects this currency trend, along with excess sourcing capacity and a favorable buying environment, to give companies room to either improve profitability or reinvest in their product ranges. 

Still, the brokerage emphasized that “the main challenge for the sector will be gaining top line momentum,” pointing to tougher comparisons following strong Autumn 2024 trading.

Earnings expectations across leading European retailers have also been revised. RBC is maintaining forecasts for Inditex but sees only modest earnings growth, with EPS projected to rise 2% in 2025 and 7% in 2026. 

The brokerage cut its EPS outlook for H&M by 1% to 7% for 2025-26, noting that improvements in womenswear have not yet broadened to menswear and kidswear. 

JD Sports’ forecasts were raised by 3% to 5% for 2026-27, while Boohoo’s were reduced, and WH Smith’s 2026 profit before tax estimate was cut by 22%.

Stock recommendations reflected this divergence. RBC rated Next, Marks & Spencer, JD Sports and Zalando “outperform,” while Inditex , Boohoo and Ocado were rated “underperform.” 

H&M was rated “sector perform,” with a price target of SEK145, while Inditex was given a €43 price target with the same rating. 

WH Smith’s target was lowered from £12 to 850p, while JD Sports’ target was lifted to 110p from 95p.

Valuation multiples also reflected the weaker growth outlook. Inditex is trading at about 22.5x 2025 earnings with a 4% dividend yield, while H&M is at about 18.5x 2026 earnings with a 5% yield. 

RBC described Inditex’s valuation as “full” given its normalized growth trajectory, while it said H&M will need to improve sales momentum for a rerating.