Retail top picks for 2026 revealed
Next delivered bumper returns for shareholders during a year of contrasting fortunes for the UK retail sector in 2025. Who are the contenders to take the crown in 2026?
10th December 2025 13:54
by Graeme Evans from interactive investor
An upgrade for Sainsbury (J) (LSE:SBRY)’s and top-pick status for Tesco (LSE:TSCO) and Watches of Switzerland Group (LSE:WOSG) are among the highlights after a City bank disclosed its retail sector preferences for 2026.
- Invest with ii: Top UK Shares | Share Tips & Ideas | Cashback Offers
Deutsche Bank’s report strikes a cautious tone overall, particularly in relation to those retailers without a clear point of consumer differentiation or with exposure to lower-income demographics and more discretionary home categories.
As a result, the bank downgraded B&Q owner Kingfisher (LSE:KGF) to Sell and placed it alongside Hold-rated B&M European Value Retail SA (LSE:BME) and Associated British Foods (LSE:ABF) among its three least-preferred stocks in UK and European retail.
Deutsche Bank prefers more globally diversified businesses, growth compounders driven by either inflation or new space and those with exposure to more affluent consumers.
It does not expect a repeat of this year’s high level of share price dispersion after price/earnings revisions drove Next (LSE:NXT) and Wickes Group (LSE:WIX) shares up by as much as 50% and B&M down by 50%.
- ii view: Next goes from strength to strength
- eyeQ: Sainsbury’s slump triggers trading signal
- Why Barclays shares make this portfolio of top stock picks
Next, for example, benefited from a significant change in investor perception as its overseas sales growth has moved the retailer out of the City’s UK retail bucket into the international one, bringing reduced risk and volatility as well as a larger addressable market.
However, with Next trading on a multiple of about 17.5 times 2026 calendar-year earnings, the bank struggles to see further material upside from a valuation perspective.
Next is due to post its Christmas trading update on Tuesday 6 January, followed by Marks & Spencer Group (LSE:MKS) and Tesco on 8 January and Sainsbury’s on Friday 9 January.
Elsewhere in the UK clothing sector, the bank has a Buy stance and 435p price target on Marks & Spencer and Hold recommendation and 2,100p target on Primark owner AB Foods.
It remains positive on UK food retail, particularly Tesco as the bank sees scope for further earnings momentum through strong execution and market share growth.
- ii view: Tesco – an investment staple?
- Stockwatch: international growth could boost this cheap share
- Share Sleuth: the two trades I made to cut cash pile
After a strong 2025, the Buy recommendation and slightly higher price target of 500p is underpinned by the prospect of 10% earnings per share growth in the 2027 financial year alongside a 4% dividend yield.
The bank also upgraded its price target on Sainsbury’s from 310p to 350p, noting strong momentum in grocery as well as earnings growth supported by buybacks and the addition of new space.
However, Tesco still ranks higher than its rival as the more defensive quality compounder.
The other UK top pick in the bank’s retail coverage is Watches of Switzerland, which has been backed for recovery after shares were blighted by a series of overhangs outside the company’s control, including US import tariffs and Rolex’s acquisition of Bucherer.
The report highlighted increasing evidence that these concerns have been overblown or misplaced, adding that the company benefits from a multi-brand wholesale model where barriers to entry are high due to heritage and relationships.
The bank has a price target of 550p, which is based on its valuation of 13 times 2026 earnings. However, it sees potential for shares to re-rate towards a mid-teens P/E multiple in the event of better visibility on US acquisition development and stronger consumer demand.
- Magnum Ice Cream Company: what happens now?
- Shares for the future: a rare double downgrade
- Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
The valuation of Kingfisher has moved towards recent highs but Deutsche Bank warns that the investment case has become increasingly reliant on the UK.
It warns that this market is likely to slow in 2026 as B&Q and Screwfix contend with strained levels of consumer spending and annualisation in the benefit from Homebase closures.
The bank, which cut its price target from 285p to 255p, said: “The track record on cash returns has been impressive but in our view this no longer offers scope for an upside surprise given it is largely included in estimates.”
On B&M, the bank warns of a number of structural headwinds that include significant exposure to lower-income demographic consumers who remain under financial stress.
More fundamentally, it said there is a risk that B&M looks like a company which is less relevant to consumers, with no online offer and increasingly less compelling reasons to visit a B&M store.
The bank cut its price target from 235p to 180p and moved from Buy to Hold.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.