The UK retail sector is being buffeted by various headwinds and tailwinds - and the best companies to invest in are those that can ride the wave and offset the pressures, says Deutsche Bank, including Next PLC (LSE:NXT) and Watches of Switzerland Group PLC (LSE:WOSG).
Least preferred are JD Sports Fashion PLC (LSE:JD.), Associated British Foods PLC (LSE:ABF), Currys PLC (LSE:CURY) and Boohoo Group PLC (AIM:BOO).
Two main themes dominating the retail narrative, argued analyst Alison Lygo, the first is how companies manage extra employee cost pressure from the Autumn Budget and the second is about how strong consumer's discretionary spending will be in the next couple of months.
"We haven't downgraded our estimates on the basis of wage headwinds, driven by our view that much is still to play for in terms of offsetting," said Lygo.
"However, as retailers reach for levers of price and cost control, we view some as much better positioned than others," she said
As for spending, Lygo noted that discretionary spending in 2024 has lagged income growth, and she believes consumer confidence is the key economic data to watch to determine whether spending ticks up in the year ahead.
The best placed to navigate budget impacts are seen as Next, Watches of Switzerland, Moonpig Group PLC (LSE:MOON) and Motorpoint Group PLC (LSE:MOTR, OTC:MTPTF)).
"For a 'sleep at night' way to participate in discretionary spending recover," Lygo suggested Moonpig and Marks and Spencer Group PLC (LSE:MKS).
Share prices that offer an "attractive entry point on a compelling mid-term story" are seen at Watches of Switzerland, Motorpoint, Pets at Home Group PLC (LSE:PETS), Frasers Group PLC (LSE:FRAS) and B&M European Value Retail SA (LSE:BME).
For greater potential earnings growth, there is potential gains from a return of post-Covid out-of-favour categories, which Lygo includes Dunelm Group PLC (LSE:DNLM) and Kingfisher PLC (LSE:KGF).