Retail sector stocks to buy, hold and sell

A preference for Tesco (LSE:TSCO) and Marks & Spencer Group (LSE:MKS) over Kingfisher (LSE:KGF) and Associated British Foods (LSE:ABF) was today highlighted by a City bank as it braces for tougher conditions in the retail sector.

Deutsche Bank’s analysis leans towards defensive food exposure and is increasingly wary about UK domestic cyclical sectors such as home improvement heading into 2026.

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The bank said: “Companies have done a much better job offsetting the cost pressures than initially feared but the main fear now is the risk of unemployment and further weakness in consumer confidence given inflation.”

It believes that consumers are more fearful than at any point since the pandemic, reflecting growing concerns as labour demand cools, inflation ticks up and the news cycle focuses on potential tax rises in the Autumn Budget.

The bank’s household cash flow model suggests income growth peaked at the turn of the year and that this is expected to fade sequentially over the remainder of 2025.

Costs are set to increase over the remainder of 2025, which puts a squeeze on discretionary spending power from 9% in the first quarter to 3% in the current half year.

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Among its recommendation changes, the bank downgraded the retail, sugar, grocery and ingredients conglomerate Associated British Foods to Sell with a target price of 2,130p. The shares today fell 89p to 2,225p, having recovered from 1,880p in early April.

It said: “We see headwinds for the recovery in Sugar profitability, margin contraction in Grocery and a weaker like-for-like recovery than expected for Primark given our more cautious view on the UK consumer.”

The City’s view on Kingfisher has been improved in recent months but Deutsche Bank believes this is now in the price and that a valuation of 11 times forecast 2026 earnings “feels more reasonable given the macro pressures”.

The B&Q and Screwfix owner is now rated at Hold with a price target of 280p, down from the bank’s previous position of 320p and slightly above today’s reduced level of 269.2p.

Kingfisher’s rival Wickes Group (LSE:WIX) is also subject to a downgrade, having been the best-performing stock in Deutsche Bank’s coverage following a year-to-date rise of 45%.

The bank cut its earnings forecasts for this year and next by 5% as it moves from the higher end to the lower end of the City’s consensus range.

It said: “Given our concerns on the UK consumer and inflationary pressures delaying further interest rate cuts, we think a tougher macro backdrop is likely to weigh on recovering home improvement spend.”

The shares fell 19.25p to 201.3p after Wickes was cut to Sell with a new price target of 195p.

Next (LSE:NXT) has been another star performer among the UK domestic retailers, with an enviable track record of earnings upgrades driven by better than expected like-for-like sales performance. 

The biggest boost has come from international operations, but Deutsche Bank believes this momentum is likely to fade and leave the UK a more important driver of profit growth. 

The bank’s price target has increased to 11,600p in order to reflect margin progress but Next is among the least preferred stocks alongside AB Foods, Kingfisher and Wickes. The shares were today 45p cheaper at 12,185p.

The most preferred stocks are Marks & Spencer and Tesco, as well as B&M European Value Retail SA (LSE:BME) and Dunelm Group (LSE:DNLM) in the FTSE 250 index.

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M&S shares have underperformed year-to-date but Deutsche Bank believes the impact of the recent cyber attack has not derailed the mid-term investment case.

The stock trades on 11 times forecast earnings, which is below the long run average despite the recent improvement in the sustainability of earnings growth. The bank’s valuation implies a multiple of 13.5 times, which leads to a price target of 435p.

Deutsche Bank, which is generally constructive on the UK food retail sector, regards Tesco as well placed to continue its progress having invested to defend its value position.

Tesco trades on about 15 times 2025 earnings, ahead of Sainsbury (J) (LSE:SBRY)’s on 14 times but is seen as better placed than its rival in the current inflationary and competitive environment. 

The bank, which has a price target of 470p compared with today’s level of 430p, said: “With a management team focused on free cash flow generation to fund shareholder returns, we see scope for multiyear compounding.”

B&M has been one of the weakest-performing stocks in the bank’s coverage this year, driven by a combination of structural fears about like-for-like growth in the discount category and earnings disappointment.

The bank said the chain scores well in terms of robust cash generation and return on capital employed and looks cheap on most valuation metrics.

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A return of food inflation may be a relative benefit for B&M given its approximate 20-25% food exposure, while the bank expects to see some trading down in a more inflationary environment. 

B&M trades on a 7.5 times forecast 2026 earnings, which compared with the bank’s 12 times multiple for a 390p target price. It also flags the potential for share buybacks in 2026, which should “turbocharge” earnings per share growth.

On Dunelm, the bank sees scope for earnings momentum driven by tight cost control and upside risk on gross margin. The bank increased its price target to 1,360p, which compares with today’s level of 1,224p.

It added: “We like Dunelm’s best-in-class proposition with strong own brands, pricing architecture and multichannel proposition.

“We therefore anticipate market share gains to continue and drive sales. Current trading should benefit from strong trends in the underlying market.”