Deutsche Bank starts coverage of 6 retail stocks; prefers Asos, B&M and M&S

Deutsche Bank initiated coverage on six UK retail stocks on Tuesday, with a preference for Asos, B&M European Value Retail and Marks & Spencer.

The bank started those three stocks at ‘buy’, while Dunelm, B&Q owner Kingfisher and Next were initiated at ‘hold’.

Deutsche Bank noted that the sector has been strong - up 25% year-to-date - but said it doesn’t believe it will be possible to count on the same degree of sales and margin surprises across the sector next year.

"Christmas trading is likely to be robust, in our view, but there is a risk this represents the last hurrah of post-pandemic spending recovery.

"The UK retailers are generally in good shape with margins largely expected to recover in 2024 and balance sheets in good shape but growth will likely be anaemic, in our view," it said, adding that it was "time to become more selective".

DB said its ‘buy’ ratings reflect businesses where it has seen, or expects to see, a fundamental change in operations and valuations are yet to fully reflect this.

"For M&S we like the culmination of five years of strategic and operational changes coming to fruition and exposure to an older customer base which we view as more resilient in this market," it said.

"B&M has seen a step up in its margin profile, ambitious new store opening targets should deliver sector-leading sales growth over the next three years and structurally we see growth in the discount retail segment.

"Asos has had a tough few years and is a work in progress but we think the commercial direction will increase its brand differentiation, a margin recovery is on the cards and we expect online sales to recover lost ground. The final piece is that all of these companies have found a new capital discipline that should reassure investors."

The bank’s target prices for Asos, B&M and Marks & Spencer are 500p, 660p and 310p, respectively.

It has price targets of 1,045p for Dunelm, 255p for Kingfisher and 7,350p for Next.

As far as Dunelm is concerned, Deutsche said it has had an impressive long-term growth but the UK homewares market is set to get a bit tougher according to industry data sources and its own retail survey, which make it a bit more cautious in the short term.

It said that while Kingfisher’s management has made material improvements to the business and shown a strong focus on cash, and the valuation looks cheap, its caution on the macro environment suggests further risks for earnings momentum.

Finally, on Next, it noted that the retailer has delivered four guidance upgrades this year and said expectations have not been carried away for FY25 estimates, "but we see limited scope for multiple expansion given the macro pressures on the core customer base".