RBC Capital Markets sees limited upside for the European retail sector, cautioning that sluggish consumer spending is likely to outweigh benefits from healthier margin conditions.
In a report published Monday, the bank said its most recent pricing survey of the UK apparel market revealed largely steady prices. It found Marks & Spencer, Zalando, and H&M becoming more competitive compared with last year. At the budget end of the spectrum, Shein gained share against Primark, while online fast-fashion player PrettyLittleThing became more expensive.
RBC argued that these shifts in pricing dynamics won’t be enough to counter household concerns over stretched cash flow, higher taxes, and elevated living costs.
Still, the brokerage highlighted that gross margin prospects for apparel retailers remain favorable, pointing to a 5% year-over-year decline in the U.S. dollar versus both the euro and the pound in the second quarter. Along with ample sourcing capacity and a supportive buying environment, this trend gives retailers flexibility to either bolster profitability or reinvest in their assortments.
Even so, RBC stressed that “the main challenge for the sector will be gaining top line momentum,” citing more difficult year-on-year comparisons following a strong Autumn 2024 trading season.
The outlook for corporate earnings has also shifted. RBC kept forecasts for Inditex steady but only anticipates modest earnings growth, with EPS seen up 2% in 2025 and 7% in 2026. Projections for H&M were trimmed by 1% to 7% for 2025-26, as gains in womenswear have yet to carry over to other categories. Estimates for JD Sports (LSE:JD.) were raised by 3% to 5% for 2026-27, while cuts were made to Boohoo and WH Smith (LSE:SMWH), with the latter’s 2026 pre-tax profit estimate reduced by 22%.
Stock calls reflected the split outlook. RBC rated Next (LSE:NXT), Marks & Spencer (LSE:MKS), JD Sports, and Zalando (TG:ZAL) “outperform.” Inditex, Boohoo (LSE:DEBS), and Ocado (LSE:OCDO) were placed at “underperform.” H&M was rated “sector perform,” with a SEK145 target price, while Inditex was assigned a €43 target under the same rating. WH Smith’s target price was lowered to 850p from £12, while JD Sports’ was raised to 110p from 95p.
Valuations also illustrate the tougher growth picture. Inditex trades around 22.5 times 2025 earnings with a 4% dividend yield, while H&M is at roughly 18.5 times 2026 earnings with a 5% yield. RBC called Inditex’s current multiple “full” given its normalized growth outlook, while stressing that H&M must deliver stronger sales momentum to merit a rerating.
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