Retail may be recovering, but not all shops are sharing the spoils.
RBC’s latest European Retailing Primer strikes a cautiously selective tone, arguing that “bifurcation in trends” makes stockpicking crucial.
Valuations have firmed as sales momentum and sourcing conditions improve, but the broker says a split is emerging between steady defensive names and more cyclical retailers.
Among UK stocks, RBC’s preferred picks are JD Sports Fashion PLC (LSE:JD., OTC:JDSPY) and Kingfisher PLC (LSE:KGF).
Both, it says, are attractively priced and underappreciated for their sales and earnings potential.
JD’s global footprint and cash returns keep it high on RBC’s list, while Kingfisher’s self-help story, through digital expansion, trade exposure and improving margins, is seen as under-recognised.
Dunelm also moves up the ranks with an upgrade to 'outperform' and a higher target price of 1,300p, reflecting “good topline growth, gross margin momentum and likely additional cash returns”.
By contrast, Frasers Group is cut to 'sector perform' after a strong run leaves less upside to RBC’s 800p target.
Elsewhere, Next PLC (LSE:NXT) remains a core holding, with price targets lifted to 15,500p after strong third-quarter trading and better international growth prospects. Halfords gets a modest earnings bump thanks to stronger sales and margins.
RBC is more restrained on the broader UK names such as Tesco, Sainsbury’s and Marks & Spencer, viewing them as low-margin and competitive businesses where cash returns, rather than earnings growth, may drive performance.
The bank’s conclusion is that the sector still offers a selective opportunity, but with real wage growth slowing and consumer caution returning, investors will need to focus on those retailers that combine operational control, solid cash generation and valuation support.