European Apparel Retail: Reiterate GM concerns into 2027

Reiterate expectations for lower gross margin into 2027. The September Apparel Retail earnings season mostly delivered small misses or disappointments (ITX, ABF, HMB), only offset by the Next beat and raise. Input costs are becoming an increasingly central debate as we head into 2027. While management teams remain quite vocal on their ability to protect gross margin into next year, we are not certain that the consumer environment will support a combination of volume demand and price increases; we expect our companies will only be able to partly offset cost increases with pricing. We change estimates across Inditex, H&M, Next, ABF and Zalando. The recent sector de-rating reflects increasing investor concern around COGS due to higher-for-longer oil prices. We reiterate our ratings (Buy ITX, ZAL, Neutral NXT, Underperform HMB, ABF) and POs. Costs: about 70% of COGS is in USD and the dollar strengthened ~7% YoY vs SEK;