Deutsche Bank has struck a more cautious tone on the retail sector for next year, pointing to what it describes as an unusually wide dispersion in valuations and limited scope for further multiple expansion among this year’s strongest performers.
The bank says the spread in price-to-earnings ratios across its coverage now sits at roughly 19 times, and even the UK-only group shows a gap of about five times.
Against a backdrop of muted UK and European growth in 2026, analysts argue that the rerating enjoyed by several retailers in 2025 is unlikely to continue.
Alongside its sector view, Deutsche has issued several rating changes. J Sainsbury PLC (LSE:SBRY) is upgraded to 'buy' with a higher price target of 350p, up from 310p.
Wickes Group PLC (LSE:WIX) moves up to 'hold', with its target raised to 235p from 195p.
At the other end of the spectrum, Kingfisher PLC (LSE:KGF) is cut to 'sell' with a reduced target of 255p, down from 285p, while B&M European Value Retail SA (LSE:BME) is lowered to 'hold', with its target cut to 180p from 235p.
The analysts’ preferred corners of the market are those they believe can weather sluggish consumer spending and rising costs.
Their most favoured subsectors are premium discretionary names, Watches of Switzerland is highlighted, along with sporting goods through adidas, European clothing via Zalando, and food retail, where Tesco sits atop the list.
Least preferred are do-it-yourself retailers such as Kingfisher, discounters including B&M, and UK clothing, where Associated British Foods is the representative name.
For 2026, the themes are familiar. Deutsche Bank favours companies with substantial international exposure, arguing that the UK faces weaker growth in disposable income, elevated cost pressures and slower gross domestic product.
It also picks out businesses that can benefit from inflation, either through essential spending categories or tight cost control, and retailers with “net space growth”, meaning those still opening stores rather than relying solely on like-for-like sales.
A final group is what the analysts call “growth compounders”: companies able to reinvest steadily to strengthen their competitive position.
The warning signs, in their view, sit with retailers lacking a clear proposition for consumers, businesses serving lower-income customers with limited spending power, and those focused on more discretionary home-related categories. They also flag that valuations in many high-quality names are now edging towards peak levels, leaving less margin for error in a tougher trading climate.
The message is not outright gloomy, but it does suggest a more selective approach for investors after a year in which share price performance has pulled widely apart.