UK retailers have enjoyed a strong month on the stock market, but Deutsche Bank (DB) believes the rally reflects improving company-specific trading trends as well as a broader recovery in investor sentiment towards consumer discretionary stocks.
The bank said the strength was not confined to the UK or any particular retail segment, with European names including Zalando, Puma, adidas and H&M also recording gains, while previously less-favoured stocks generally outperformed more popular holdings.
Among UK retailers, JD Sports, Wickes, Pets at Home and Tesco were among the strongest performers, supported by improving trends in home improvement, discount retail and food, although DB cautioned that some of the gains could reflect investors positioning for a reversal in sentiment.
Wickes and Dunelm have reported better current trading, although some improvement may represent a recovery in demand deferred during the unusually warm summer, while B&M appears to be benefiting from a stronger like-for-like sales trend and improved confidence in its new chief executive.
Marks & Spencer has continued to benefit from stronger food sales, but clothing performance remains mixed, while Next has delivered better trading and upgrades without attracting the same reversal trade because investors already favour the shares.
The bank also sees signs that the sporting goods market may be approaching an inflection point, as adidas, Puma, JD Sports, Nike, On Running and Lululemon have all rallied over the past month.
DB said falling inventory levels should gradually reduce excess stock in the lifestyle category and ease promotional activity, with adidas suggesting the market could normalise by the end of 2027.
However, the bank warned that higher oil prices, renewed inflation and uncertainty over consumer spending continue to cloud the outlook, while European consumer confidence weakened in October.
Investors will focus on results from Associated British Foods, Zalando, Marks & Spencer, Next and ASOS this week, with trading updates, margins and full-year guidance likely to shape the next direction for retail shares.
