RBC sees scope for earnings upgrades at Next and Inditex as cost pressures ease

RBC Capital Markets said there is a strong chance of consensus earnings upgrades for Next PLC and Inditex after its European consumer and retail conference in London. The broker is more upbeat on consumer trends and on the outlook for input and labour costs, suggesting improving margins and fundamentals for the two retailers. The note is supportive for sentiment, but the article does not cite any new company-reported figures or formal guidance changes.

Analysis

This is less about a single upbeat conference read-through and more about a near-term earnings revision loop in European discretionary retail. When input and wage inflation decelerate while demand remains resilient, operating leverage can reassert itself quickly because these businesses have already spent the last year training investors to underwrite caution; even a modest beat can trigger outsized multiple re-rating. The market is still likely underestimating how much consensus margins can expand if promotional intensity stays contained into the next two reporting cycles.

The competitive second-order effect is more interesting than the direct beneficiaries. If larger, better-capitalized chains with stronger brand equity can preserve full-price selling, weaker peers will likely defend share with discounts, which shifts mix toward the winners and forces a more rational industry structure. That can become self-reinforcing: better gross margin visibility improves inventory planning, lowers markdown risk, and makes suppliers more willing to prioritize volume allocation to the strongest accounts.

The main risk is that this is a short-cycle call, not a structural one. A 1-2 quarter improvement in cost lines can be reversed quickly if consumer traffic rolls over, if freight or wage inflation inflects higher again, or if FX turns against import-heavy retailers. The market is most vulnerable to a false positive here: upgrades may arrive before the actual sell-through data confirms them, creating a classic post-conference bull trap if management commentary in the next earnings season does not validate the optimism.

The contrarian angle is that the opportunity may be more in the quality spread than the sector beta. If the best operators are the only names able to translate “better trends” into durable EPS revisions, then chasing the whole retail basket is the wrong expression; the trade should be concentrated in names with pricing power and inventory discipline, while avoiding the structurally promotional laggards that will see any demand improvement leak into higher competition rather than higher profit.

Key Decisions for Investors

• Go long NEXT (LSE:NXT) on pullbacks over the next 1-3 weeks ahead of the next estimate cycle; asymmetry is attractive if consensus moves up 3-5% while the stock only needs modest multiple support to re-rate.
• Go long Inditex with a 3-6 month horizon; prefer it as the cleaner earnings-upgrade expression versus the broader European consumer basket because it should capture margin expansion with less balance-sheet risk.
• Pair trade: long NEXT / short a lower-quality apparel or general merchandise retailer in Europe with higher markdown risk; target a 5-10% relative outperformance if the margin backdrop stays benign into the next quarter.
• If already long the sector, use call spreads rather than outright stock for 1-2 quarter upside participation; this limits downside if the cost narrative proves transitory and upgrades fail to stick.
• Trim exposure if upcoming trading updates show traffic up but gross margin flat-to-down; that would signal the market is over-earning the revision cycle and the trade has likely moved from early-cycle to consensus.