Citi Research has moved Pepco to a buy rating from neutral and lifted its target price to ZL 40, up from ZL 31, saying recent results and management commentary signal a turning point in the business.
Citi noted that Pepco's profit for the first half of 2026 was 6% above the brokerage's own forecast and 17% higher than the VA forecast. The firm said that, together with management's remarks, the numbers confirm a transition from a period of restructuring to one focused on growth, supported by improving margins and a policy to return more cash to shareholders.
In its published view, Citi flagged several drivers behind the upgrade and the higher target. The broker pointed to improved 2026 financial targets, an ambition to accelerate expansion in Western Europe, and a planned special share buyback of €400 million. Citi concluded that the prevailing share price did not fully capture the improved outlook and described the situation as a compelling investment opportunity.
Citi raised its 2026 and 2027 EBIT estimates for Pepco by 12% and 16%, respectively, and increased its profit estimates by 6% for 2026 and 16% for 2027. The broker also said it expects the group's gross margin for the year could exceed the company's guidance of 49.4% on the basis of what it called constructive management comments around product sourcing, planning and a reduced need for discounts.
Looking out to 2027, Citi expects margins to improve slightly as Western Europe operations get stronger, and noted that Pepco will publish official 2027 targets in December.
The research house emphasized steady like-for-like sales momentum: Pepco has posted positive like-for-like sales growth for six straight quarters. Sales in Western Europe rose 14% year-on-year in the first half of 2026 and continued to register double-digit growth into the third quarter, a pattern Citi interprets as evidence that Pepco's value proposition resonates with customers in that region.
Citi also described the negative impact from exiting food sales as now ending and highlighted a new loyalty app in Poland as a potential contributor to further sales growth.
On expansion, Citi said Pepco is on track to open 250 new stores in 2026. The broker sees Western Europe as the principal engine of future growth, noting the company intends to open 600 new stores there over four years. Citi considers a roll-out of 300-350 new stores in Western Europe in 2027 to be achievable.
Capital returns feature prominently in Citi's thesis. The broker said Pepco is adopting a policy to return more cash to shareholders and will execute a special €400 million buyback in 2026. From 2027 onwards, Citi reported that cash generated in one year will be returned to shareholders the following year through a mix of regular dividends and special returns.
Citi derived its ZL 40 target price using an average of two valuation approaches. One was a price-to-earnings multiple valuation that produced a ZL 38 outcome, equating to 13 times price-to-earnings on Citi's 2027 estimated earnings per share. The other was a discounted cash flow valuation yielding ZL 41, based on a weighted average cost of capital of 11% and a terminal growth rate of 2%.
Context for investors
Citi's upgrade hinges on a cluster of operational and capital-allocation developments: better-than-expected H1 results, sustained like-for-like sales gains, a concentrated growth push in Western Europe, and a commitment to materially increase cash returned to shareholders.
Those elements combine to form the broker's view that the company is moving away from restructuring toward a period of more focused growth, with improving profitability and clearer distribution of cash to investors.
Key points
- Pepco upgraded to buy and target lifted to ZL 40 from ZL 31 by Citi, citing a business turning point.
- H1 2026 profit beat Citi by 6% and the VA forecast by 17%; Citi raised 2026 and 2027 EBIT estimates by 12% and 16% and profit estimates by 6% and 16%.
- Company plans faster expansion in Western Europe, a €400 million share buyback in 2026, and a new policy to return cash to shareholders from 2027 onward.
Sectors and markets impacted - Retail and consumer discretionary sectors in European equity markets, with potential implications for investors tracking value retailers and regional store roll-outs.
Risks and uncertainties
- Execution risk on store openings - achieving the plan to open 250 stores in 2026 and 600 in Western Europe over four years will be critical to Citi's growth thesis.
- Margin outcome uncertainty - while Citi expects gross margin could come in above the company guidance of 49.4%, actual margins depend on sourcing, planning and discounting dynamics discussed by management.
- Reliance on cash generation for returns - the new policy to return cash in the year after it is generated assumes sustained cash generation sufficient to support both regular dividends and special returns.
Each of these risks touches the retail and investor-return dynamics central to Citi's upgraded outlook.