B&M European Value Retail SA (LSE:BME) was downgraded to 'sell' by UBS and both Marks and Spencer Group PLC (LSE:MKS) and Tesco PLC (LSE:TSCO) were highlighted as 'top picks' in the European retail sector due to "strong pent-up demand".
Real wage growth has been a clear driver of consumer spending historically, analysts at the Swiss bank said, however the correlation has become broken due to soaring prices since the pandemic, confidence that has not fully recovered, higher mortgage rates and expectations about tax rises.
With the UK savings rate having reached a 13-year high, UBS said it is difficult to forecast the timing of an economic recovery, but research by the bank's Evidence Lab team "points to strong pent-up demand", with spending intent at the highest level in eight years in grocery, three years in homewares, two years in DIY and reported spend in clothing at its highest in four years.
"Sufficiently rebuilt savings with sustained wage growth in 2025 suggests that future earnings growth should spill over into the economy driving spending."
A strong rally in UK discretionary stocks in the summer has made it "tricky to pick winners", which has led the analysts to focus on midterm winners benefiting from structural changes in their industries and improved strategies.
We focus on the micro detail of market share gains in the midterm that we believe create the headroom for earnings upgrades on a sustainable basis that could benefit from an eventual macro recovery. While the market is pricing in some of the near-term momentum, we believe that the structural changes or midterm re-rating potential are not fully factored into some of the key ideas that we discuss below.
Hence, M&S has been tipped as a 'buy', joining Tesco as a top pick in the sector, as "we don’t believe the market is pricing in structural outperformance and sustainable midterm market share gains" in both its Clothing & Home and Food arms, with top-line upgrades driving a re-rating "reflecting a vastly superior business vs history".
Not quite a retailer, but Domino's Pizza Group PLC (LSE:DOM) is also included in the note with a new 'buy' rating, while home furnishings chain Dunelm Group PLC (LSE:DNLM) is upgraded to 'buy' and B&Q owner Kingfisher PLC (LSE:KGF) upgraded to 'neutral' from 'sell'.
B&M however gets a 'sell' rating with a share price target of 390p versus the last close at 430p.
Having outperformed throughout the 2010s via a disruptive direct-sourcing model that coincided with growth at Aldi and Lidl, the UBS team say they "now see a diminishing competitive advantage in FMCG (the key traffic driver) that appears to have at least paused this virtuous circle, despite a potential share gain opportunity in non-food".