European retail is undergoing a pronounced reordering, driven by two opposing dynamics: intense price competition from Shein compressing the low end, and a subset of consumers migrating toward fewer, higher-quality purchases at the mid-to-upper end. RBC Capital Markets says this bifurcation is crystallising winners and losers across the region.
These trends are unfolding alongside a range of external pressures - disruption tied to conflict in the Middle East, changes to EU customs rules and rising freight costs - making positioning and execution especially important. In that context, RBC nominates four stocks it believes are best placed to outperform their peers: Next, Inditex, Kingfisher and Zalando.
Next (NXT) - Outperform, PT £155)
RBC describes Next as the standout UK retail name, arguing the company has become materially more than a domestic clothing retailer. International online sales were reported to have grown 18% in the latest full year and are projected to expand by 16% next year, with particularly strong showings in Germany and the Middle East despite the latter's disruptions. The Zalando ZEOS fulfilment partnership is also cited as a contributor to cross-border growth.
CEO Simon Wolfson has pushed back on worries that AI-driven, agentic shopping will disintermediate retailers online, noting that delivery economics and the costs of returns reduce the immediate threat from such technologies. Financially, Next is described as delivering a roughly 8.5% compound annual growth rate in EPS over three years, trading at about 16 times forward earnings - low by global growth retail standards - and returning in excess of 5% in cash annually when buybacks are included. RBC frames this mix of quality, growth and shareholder returns as a rare combination.
Inditex (ITX) - Outperform, PT €62)
RBC views Inditex as the clearest beneficiary of the market split away from ultra-cheap fast fashion. While Primark and H&M have struggled with Shein's pricing pressure or repositioning challenges, Zara has managed to lift relative pricing while retaining the fashion freshness that keeps customers returning.
A Spring pricing survey conducted by RBC across five European markets reportedly shows Zara sitting meaningfully above the lower end of the market - a repositioning that RBC says H&M has not matched. Inditex's three-year EPS compound annual growth is similar to Next's at about 8-9%. The group also sits on a fortress balance sheet with net cash approaching nearly billion, and pays a 3.8% dividend yield. At roughly 23 times earnings, RBC views Inditex's premium valuation as justified by its scale and execution.
Kingfisher (KGF) - Outperform, PT 360p
RBC calls Kingfisher the most contrarian pick of the quartet. The market has treated the retailer as an interest-rate-sensitive cyclical - linked to housing activity and discretionary spend - but RBC argues the structural elements of Kingfisher's transformation are underappreciated.
The retailer's B&Q digital marketplace is now in its third year and is drawing new customers while generating take rates of 10-15%. The trade customer segment is expanding, Screwfix continues executing an expansion playbook, and AI-supported inventory management is producing gradual working capital improvements. Valuation metrics highlighted by RBC include an 11 times forward earnings multiple, a 4.4% dividend yield and a free cash flow yield above 10%. RBC notes there is material upside potential if the market re-rates the stock for its digital and trade-driven growth rather than its legacy cyclical label.
Zalando (ZAL) - Outperform, PT €30)
Zalando is portrayed as offering the most compelling growth-to-valuation profile among RBC's covered European retailers. Its three-year EPS compound annual growth rate is cited at 17% - the highest in the peer group - yet the shares trade at roughly 13 times earnings, a meaningful discount to slower-growing peers.
Central to Zalando's advantage is its ZEOS logistics platform, which enables brands and retailers - including Next - to fulfil orders across mainland Europe from a single inventory pool. RBC views ZEOS as maturing into a structural edge. The gross margin pressure observed last summer, when Zalando increased promotions in response to Shein's European push, is characterised as a one-off episode rather than the start of a multi-period trend.
RBC also points to an upcoming regulatory change that could soften Shein's pricing advantage: from July 2026 the EU will remove the duty-free threshold for small parcels, narrowing Shein's edge slightly and offering Zalando more room at the promotional end of the market.
Taken together, RBC's picks reflect different ways to win in a split market - Next by combining international online growth with strong shareholder returns, Inditex by moving upmarket while preserving fashion appeal, Kingfisher by converting digital and trade initiatives into a new growth profile, and Zalando by pairing rapid EPS growth with a logistics-powered structural advantage.