UK retailers battle for consumer wallets against a tricky backdrop

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The UK retail sector is enduring its latest challenging period. Modest economic growth and stabilising sales volumes are being offset by increased costs partly due to 2025’s increases to the living wage and employer national insurance contributions. These factors have combined with reductions in business rates relief to squeeze margins.

 

Shoppers remain cautious due to persistent inflationary pressures and higher household energy costs, linked to the crisis in the Middle East, which means consumers are prioritising value over splurges in discretionary spending.

This trend can clearly be seen in lower-income households where nearly half of income goes on essential items like rent, food and drink, according to consultancy Retail Economics.

By contrast so-called ‘new age affluents’ only spend around 26% of their income on necessities which leaves more headroom for discretionary and luxury spending.

While a smaller group by size, representing around 15% to 20% of UK households, this affluent minority drives discretionary spending.

How Next has bucked the gloom

The challenging consumer backdrop has not proved a problem for clothing bellwether Next, partly due to strong execution under CEO Simon Wolfson who has built a reputation for under promising and overdelivering.

To be a successful retailer it’s important to get the right products in front of the right customers at the right times and in the right places at a price they’re willing to pay.

It sounds deceptively simple but it’s hard to execute and it’s something which Next has refined to a fine art.

 

Next has been the best performing FTSE 100 retailer with the shares recently trading near record highs, driven by repeated upgrades to guidance and disciplined shareholder returns.

Trading from more than 800 stores in the UK and Ireland as well as an online operation serving the UK and overseas, Next recently upgraded its annual outlook for the third time in 2026 after reporting a 9.2% rise in second quarter full-price sales.

Next attributed the outperformance to exceptionally warm weather and unanticipated pent-up demand in the Middle East and Northern Europe after a weak first quarter.

In addition, Next said it was able to spend more on profitable marketing than expected. The group now expects pre-tax profit of £1.243 billion for the year ended January 2027, versus prior guidance of £1.218 billion.

M&S draws a line under cyber-attack

Storied UK food and clothing retailer Marks & Spencer forecast a return to profit growth this year (to end March 2027) after performance was impacted by a cyber-attack in April 2025 which took down its click-and-collect business, online ordering and contactless payments.

The recovery in 2026 has been food-led with sales up 7%, taking M&S’s share of the Britain’s grocery market to 4.1% and 4.6% including sales sold through Ocado, as the company looks achieve its long-term goal of doubling food sales.

M&S has flagged plans to increase shareholder returns with details being revealed later this year. Chief financial officer Alison Dolan said: “I would expect that over the course of this current financial year (2026-27) we will be in a position to be clearer about our policy in that regard and the timing of those returns.”

The retailer ended its last financial year with net funds excluding lease liabilities of £338 million, providing M&S with financial headroom to enhance returns while investing for growth.

Other retailers with a winning formula

Electronics retailer Currys has engineered a genuine turnaround from a low-margin box-shifter into a multichannel ‘technology-as-a-service’ focused business.

The company recently posted a better-than-expected 18% increase in full year adjusted pre-tax profit with like-for-like sales up 4% and ended the period with net cash on the balance sheet. Currys doubled the divided and announced a £50 million share buyback.

The recovery was led by outgoing CEO Alex Bladock, who is now tasked with replicating a turnaround at Boots the chemist, Currys now generates around a third of sales in UK & Ireland from higher margin services offerings.

The company has rolled out dedicated business-to-business hubs inside its physical retail outlets serving small businesses seeking technology and cash flow management.

Home improvement retailer Kingfisher, encompassing B&Q and Screwfix in the UK and Castorama and Brico Depot in France, has leant into trade and ecommerce penetration to mitigate soft ‘big ticket’ demand.

Trade sales grew 23% in the full year to the end of January with penetration reaching 30% of group sales and ecommerce penetration reaching 21% as its third-party online marketplace grew 58% to £518 million.

 

Frasers aims for elevation

The last 12 months have been a busy period of expansion via mergers and acquisitions for sports retailer Frasers driven by its multi-year ‘Elevation Strategy’.

The Mike Ashley-led group’s latest foray saw it rescue the iconic 200-year-old Harvey Nichols out of administration, with plans to restore the department chain to profitability.

In July Frasers announced it has built a 4% stake in luxury fashion house Burberry, becoming its third largest shareholder. In June the company launched a takeover of German fashion house Hugo Boss for £1.73 billion, which the board rejected.

Undiscouraged, Frasers increased its direct stake to 47.9% and said it would actively pursue further market purchases past 50%.

In July 2026 Frasers reported full year adjusted pre-tax profit of £538 million, down 4% year-on-year, missing guidance and declined to provide a profit outlook for the April 2027 financial year.

Top of the charts

The best performer over the last year has been luxury watch retailer Watches of Switzerland, reflecting strong performance in the US and improving trading in the UK.

The performance of the shares speaks volumes on the divide between high- and low-income households on both sides of the Atlantic, as wealthy shoppers continue to snap up luxury timepieces from the likes of like Rolex and Tag Heuer.

It has also been reported that the company has held talks with potential bidders as management believes the stock market undervalues the company despite the recent strong share price performance.

At the recent annual general meeting the company reiterated its outlook for the year to April 2027 amid broad-based demand across its luxury brands.

The company projects organic revenue growth in the range of 5% to 10% and an expansion of its adjusted earnings before interest margin of between 0.4% and 0.8%.

It plans to continue selective US acquisitions and increasingly focus on fewer, higher-quality stores in the medium term.

Retail laggards

Homewares group Dunelm has been on the back foot after warning in January that pre-tax profit would land at the lower end of analysts’ consensus £214 million to £227 million range, impacted by competitor discounting which led to a sharp slowdown in sales growth.

The shares have recovered off the May lows and were given a further boost after the company posted a positive full year trading update in July which showed sales up 3.1% and pre-tax profit in line with consensus expectations, which have been revised down to £210 million.

British fashion house Burberry has been impacted by geopolitical uncertainties which dented tourist spending across Europe, Middle East and Africa in its April to June quarter.

Although Burberry swung back to a full year profit in the year to March 2026, and delivered double-digit sales growth in its core outwear categories, management’s decision to scrap the dividend has weighed on the shares.

How do the companies compare on valuations?

Most of the retailers sit on a PE (price-to-earnings) ratio of between 10.7- and 11.7-times consensus analyst earnings estimates for 2027, while Dunelm has the highest dividend yield of 5.4%.

The outliers at the low end of the spectrum are Frasers and JD Sports Fashion while Burberry and Next are outliers at the high end of the spectrum.

Shares magazine
Martin Gamble

Martin Gamble: Shares and Markets Writer

Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.

Martin graduated from the University of Kent in...

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