Europe's retail reckoning: RBC names only three stocks worth holding

Europe’s retail sector is heading into a harsher stretch, but RBC is not telling investors to give up on the space.

The retailers were already facing fragile demand before the latest energy shock, and the renewed jump in oil and freight costs has added pressure on margins.

The result is a more difficult setup for the whole sector, but not an equally difficult one.

That is why RBC’s latest view is less a blanket warning on retail than a sorting exercise.

In a stagflation scare, when costs rise and consumers turn cautious, the winners are likely to be the chains with pricing power, tight execution and a strong value proposition.

Why stagflation is a nightmare setup

For retail, stagflation is close to a worst-case backdrop. Costs go up, but demand does not.

The European Central Bank said in its latest Economic Bulletin that the war in the Middle East is disrupting commodity markets and leading to lower consumption and investment projections, especially for 2026.

The ECB now sees euro area growth of 0.9% in 2026, after revising down its outlook as the conflict fed through to energy prices and sentiment.

That macro strain is already filtering into retail.

Europe’s retail sector looked ill-prepared for another energy shock, with transport, store utilities and supply chains all exposed to higher oil and gas prices.

RBC back pricing power and operational discipline

RBC’s answer is not to flee the sector but to own the names it believes can absorb the pressure better than rivals.

Its outperform picks are Inditex, Next and Sainsbury’s.

The bank said it expects “polarized performance within the sector,” along with some concentration of spending at major grocers.

That is the heart of the thesis: shoppers do not stop spending entirely in a tougher environment, but they become choosier about where they spend.

Among the three, RBC sees Inditex as the strongest.

The broker said the Zara owner has the best pricing power in the sector and gave it a €62 target price versus a closing price of €53.40.

Next was assigned a 15,500 pence target against 13,435 pence, while Sainsbury’s was given a 385 pence target against 353 pence.

The mix is telling: one global apparel leader with brand strength, one disciplined UK retailer with a record of execution, and one major grocer likely to benefit if shoppers consolidate spending.

The losers in a tougher retail cycle

The other side of RBC’s call is just as important.

The bank downgraded Associated British Foods to underperform and WH Smith to sector perform.

It also rated 3i Group, owner of discount chain Action, underperform, forecasting a three-year compound annual decline in earnings per share of 17.9% from 2025 to 2028.

That is a useful reminder that this is not a simple “buy all discount names” trade.

Valuation, earnings risk and cost exposure still matter.