RBC Capital Markets, in a note dated Monday, positioned Next, Inditex and Sainsbury’s as favored stocks within European retail as rising costs related to the Iran conflict feed through to fuel, freight and food prices and nudge central banks toward hiking rates rather than loosening policy.
The brokerage signalled a clear divergence in expected performance across the sector. It lowered Associated British Foods to an underperform rating and cut WH Smith to sector perform, attributing the former to earnings vulnerability from competitive pressure on Primark and the latter to geopolitical exposure.
"We expect to see polarized performance within the sector, some concentration of spend at major grocers, and potentially defensive M&A as we move further into a tougher period for consumer spending," RBC wrote.
RBC's specific valuations and forecasts reflected its conviction. The broker set a €62 price target for Inditex versus a closing price of €53.40, assigning a calendar year 2026 price-to-earnings multiple of 24.7x and forecasting an EBIT margin of 20.1% for fiscal 2026.
Next was given a target of 15,500 pence against a 13,435 pence close, trading at 16.8x CY26 earnings with an expected EBIT margin of 13.5%. Sainsbury’s target was 385 pence versus a 353 pence close, with a 14.1x CY26 P/E.
On the consumer cashflow front, RBC’s compilation of ONS and OBR data points to a sharp slowdown. UK household cashflow after savings is projected to grow only 0.5% in 2026 and 0.6% in 2027, a marked drop from 7.9% in 2025. Lower-income household cashflow is expected to fall 1.7% in 2026 and decline a further 0.6% in 2027.
Interest-rate expectations have shifted in the markets, RBC noted via Bloomberg data. Pricing now reflects the potential for two rate hikes from both the European Central Bank and the Bank of England, while the US federal funds rate is expected to remain flat rather than head into cuts.
RBC’s cost-inflation forecasts for 2027 show wide variation across retailers, from a decline of 2.1% at Currys to increases of 4.7% at Marks & Spencer and Next. Associated British Foods is projected to face total cost inflation of 4.3%, driven in part by labour cost growth of 5.3%.
The broker judged Inditex to have the strongest pricing power in the group, assigning it a combined pricing score of 6.0, versus a negative 2.4 for Currys.
Next disclosed an incremental £15 million of conflict-related costs, the note said, comprising £8 million in outbound costs to the Middle East, £4 million in higher inbound UK freight and £3 million in UK energy costs. RBC observed these charges were offset by efficiencies and were not expected to change guidance.
RBC flagged several input-cost and logistics indicators that underline the pressure points. Aluminium prices were around 30% higher year-on-year. RBC’s datapoints show West Texas Intermediate crude at $114 per barrel in the second half of 2026 versus $66.10 for full-year 2025, while the Baltic Dry Index was 2,139 in H2 2026 against a 2025 average of 1,620.
Foreign-exchange movements are expected to differentially affect gross margins. RBC projects a 272 basis-point FX tailwind to Inditex’s gross margin in fiscal 2026, 151 basis points for Next plc, and 92 basis points for H&M. By contrast, H&M is also forecast to suffer a 4% negative impact on revenue from currency translation.
On smaller players and retailers with different formats, RBC rated 3i Group - the owner of discount chain Action - as underperform, setting a price target of 2,250 pence versus a closing price of 2,698 pence. The broker expects a three-year compound annual decline in earnings per share of 17.9% over 2025-2028 for 3i.
The note underlines the mechanics that will shape winners and losers across retail as cost inflation, FX effects and consumer cashflow trends conspire with a higher-for-longer interest-rate backdrop. Pricing power, the ability to pass through input costs, distribution strength and disciplined management of margin and cost levers were highlighted as differentiators for the names RBC rated to outperform.
Analyst takeaway
RBC’s framework points to selective strength among large apparel and grocery players that can either command price or benefit from currency moves, while lower-margin or highly input-cost-sensitive operators face more acute earnings risk as consumer spending tightens.