Tesco and Next downgraded on dimmer UK consumer outlook

Jefferies downgraded Tesco, Next and Associated British Foods, flagging a growing disconnect between robust like-for-like retail sales and a weakening UK disposable income outlook—forecast disposable income growth falls to 1.9% in 2026-27 from 2.6% in 2025-26 amid softer wage growth and rising unemployment. The bank warns LFL sales are outpacing incomes unsustainably, leaving retailers exposed to tough comps, margin pressure and heightened competition while the sector trades a 16% premium to the FTSE 100; ABF/Primark is highlighted as particularly vulnerable with Jefferies’ LFL forecast at -2.0% versus consensus -0.8% and EPS estimates about 3% below consensus. Jefferies’ sole retail buy is Marks & Spencer, which it views as attractively valued with defensive food exposure and recovery potential in fashion and home at under 10x 2026/27 earnings.

Analysis

Jefferies has downgraded Tesco, Next and Associated British Foods, citing a growing disconnect between robust like-for-like (LFL) retail sales and a weakening UK disposable income outlook; the bank projects disposable income growth slowing to 1.9% in 2026-27 from 2.6% in 2025-26, driven by softer wage growth and rising unemployment. The broker highlights that current LFL growth is outpacing incomes and deems that gap unsustainable, while warning that sector comps are becoming tougher in the near term.

Jefferies also flagged margin pressure, intensified competition and limited valuation support across UK retail, noting the group trades at a 16% premium to the FTSE 100; Primark owner AB Foods is identified as particularly vulnerable with Jefferies’ LFL forecast at -2.0% versus consensus -0.8% and an EPS forecast roughly 3% below consensus. These factor into a more cautious earnings outlook and higher downside risk for the downgraded names if consumer cashflows deteriorate further.

Marks & Spencer is Jefferies’ sole buy candidate on the sector call, justified by its defensive food exposure and recovery potential in fashion and home, trading at under 10x 2026/27 forecast earnings. Given the macro caveats and valuation dispersion, near-term upside for broadly exposed retailers appears constrained and contingent on incoming income, wage and employment data.

Key Decisions for Investors

• Reduce or hedge exposure to TSCO, NXT and ABF ahead of a higher-probability margin squeeze and a slowing disposable income backdrop
• Monitor weekly/monthly indicators for disposable income, wage growth, unemployment and retailer LFLs as trigger points to reassess positions
• Consider selective overweight in MKS given sub-10x 2026/27 earnings and defensive food exposure, but size positions conservatively until consumer cashflows show sustained improvement