Investing.com -- European retailers face a difficult setup heading into 2026, but value and company-led measures may help cushion the impact, according to a sector report from RBC Capital Markets dated Friday.
The brokerage said trading conditions are likely to remain challenging, with limited scope for like-for-like volume growth, making valuation discipline and “self-help” measures more important for earnings resilience.
RBC said its preference for attractively valued retailers reflects a 2025 marked by uneven demand and cautious consumers.
The year saw a strong start to autumn trading, followed by weaker activity in October and November as shoppers delayed purchases amid fiscal uncertainty and waited for Black Friday promotions.
While Christmas spending is less discretionary, RBC said late buying patterns and higher discounting risks remain, particularly for apparel retailers with elevated inventories.
Performance is likely to be driven by margin dynamics rather than top-line growth in 2026, according to RBC.
The brokerage expects an improving gross margin outlook into H2 2025 and H1 2026, supported by USD buying gains, a relatively benign sourcing environment and moderating raw material and freight costs.
These factors could help offset a tougher trading backdrop. At the same time, RBC highlighted ongoing operating cost pressures, with higher employment costs, especially for part-time and lower-paid staff, remaining a key headwind.
Cash generation remains a point of support across the sector. RBC said most European retailers stayed cash generative in 2025 and several returned additional capital to shareholders.
Companies cited include British grocers Tesco and Sainsbury’s, UK apparel retailer NEXT, home improvement group Kingfisher, food and clothing group Associated British Foods, sportswear retailer JD Sports and homewares seller Dunelm.
RBC said these cash returns underline the importance of balance sheet strength as trading conditions tighten.
Within this environment, RBC identified Spanish fashion group Inditex and UK-listed home improvement retailer Kingfisher as its top picks. Inditex is trading at about 25x CY26E P/E with a 3.5% dividend yield, following two years of elevated capital expenditure.
RBC said the group’s improving gross margin outlook and expected inflection in free cash flow are key considerations, even as it faces softer like-for-like comparisons in the first half of the year.
For Kingfisher, which operates banners including B&Q and Castorama, RBC highlighted a valuation of about 12x CY26E P/E alongside a 4% dividend yield.
The brokerage said trade customer momentum and e-commerce growth support its outlook, while an improving gross margin profile and a recovery in Poland, helped by interest rate cuts, could help offset weakness in the French market.
