European apparel retail growth slowed materially in April, according to a note from BofA Securities, with Germany at the forefront of the weakness and H&M singled out as having the biggest downside risk to earnings among major retailers covered by the bank.
BofA said its coverage of 36 markets showed aggregate apparel retail sales growth decelerating to 2.4% in April from 5.4% in March. The bank described the move as the first time it had observed a broad-based deceleration across nearly all countries in its survey.
Germany, the continent's largest apparel market, was notably weak. Citing TextilWirtschaft data, BofA reported that offline clothing sales in Germany fell 6% in April, a deterioration from a 2% decline in March. Preliminary May figures, the analysts added, showed no sign of improvement.
H&M, which derives roughly 15% of its sales from Germany, is under growing pressure from the softening demand in that market. BofA maintains an "underperform" rating on the company and forecasts second-quarter constant-currency revenue to decline by 2.1%.
The note also highlights a change in consumer purchasing patterns at H&M, with the company reporting a stronger focus on discounts since April. BofA said that trend creates additional pressure on gross margins and, ahead of H&M's June results, identified the retailer as having the highest downside risk to earnings per share among the names it covers.
Weakness was not confined to continental Europe. In the UK, BofA pointed to British Retail Consortium data showing retail sales down 3% in April. UK clothing sales growth slowed to 3.4% compared with 6.6% a year earlier, and Kantar data referenced by the analysts signaled a sharp decline in fashion spending.
On the cost side, BofA said its basket of apparel raw materials had increased 7% since the end of 2025 and reiterated its expectation for factory-gate price inflation in the 5% to 7% range. Logistics costs are also elevated: the bank noted air freight rates were more than 30% higher year-on-year in May and that shipping costs on key routes had risen between 16% and 33%, according to the data cited in the report.
Against this backdrop of softer demand and rising input costs, BofA left several stock-level views intact or adjusted them selectively. The broker reiterated a Buy rating on Zalando while trimming its 2026-2028 EBIT forecasts by 1% to 4%. Zalando reported first-quarter adjusted EBIT of 65 million euros, which exceeded consensus, although BofA said part of that outperformance stemmed from a provision release in the company's business-to-business unit. The bank kept its 35-euro price target for Zalando, pointing to market-share gains and gains from restructuring efforts.
For Next, BofA increased its fiscal 2027 and 2028 profit estimates after the British retailer raised full-year profit guidance following stronger-than-expected first-quarter sales. The broker retained a "neutral" rating on Next but reduced its price target from 144 pounds to 140 pounds.
Valuation metrics for the sector, BofA noted, show the European apparel group trading at 21.2 times forward earnings, which represents a 5.5% discount to its long-term average. Nonetheless, the analysts cautioned that consensus expectations of 8% earnings-per-share growth over the next 12 months are above BofA's own 6% forecast, leaving room for downside to market expectations. Within the coverage universe, Inditex is the bank's preferred stock.
Key points
- Apparel retail growth across 36 markets fell to 2.4% in April from 5.4% in March, marking a widespread slowdown.
- Germany shows pronounced weakness - offline clothing sales dropped 6% in April - putting pressure on retailers with significant German exposure such as H&M.
- Cost pressures persist: raw material basket up 7% since end-2025; air freight +30% year-on-year in May; shipping costs up 16% to 33% on key routes.
Risks and uncertainties
- Downside to retailer earnings estimates if demand in core European markets remains weak - this primarily affects apparel and retail sector earnings.
- Margin compression risk from increased discounting and higher input and logistics costs - impacts gross margins across apparel retailers and supply-chain exposed suppliers.
- Consensus EPS growth expectations may be overly optimistic relative to BofA's forecast, creating potential downside for investor expectations in the sector.