Investing.com — It’s been a tough start to 2025 for UK retail stocks, with concerns about the UK budget filtering through to businesses and consumers. On Friday, data revealed that UK retail sales fell in December despite expectations of a bounce in the holiday season.

UK consumers returned to spending, with retail sales falling 0.3% in December, well below the consensus of 0.4% growth. However, Jefferies analysts are “cautiously optimistic” for the rest of the year.

In their “Real-time Retail Round-Up” note, Jefferies analysts said a “slower Christmas trading trend is becoming apparent.”

Key retailers such as Greggs (LON:), Dunelm, JD (NASDAQ:) Sports, M&S Clothing/Home, and B&M failed to expect comparable sales or profits.

Although these shortfalls do not significantly affect earnings estimates, the market reaction is more important.

The company says that the slow sales trends in Q4 2024 are reflected in their Retail Trends Barometers, which show an average run-rate of -4% until 2023, slowing to -9% in Q3 2024, and further decreased to -13% in the last quarter of 2024.

Looking ahead, Jefferies maintains a cautiously optimistic outlook for 2025.

“While aware that the sector has challenges to face (opex/NIC, consumer confidence), especially in the near term, we think that the positive demand backdrop and the cyclically high savings ratio should support to a more positive 2025 than the market expected.”

Jefferies also highlighted the valuation aspect, noting that the sector trades at approximately 11x multiple, a 15% discount to its long-term average.

They recommend “selectively increasing exposure” and identify their Top Picks for 2025 as Main Meal (LON:), Frasers, and DFS.