The market was hit by a bout of nerves following the recent bull run and the FTSE 100 suffered its biggest loss of value in two months. General retailers performed slightly below the market but food groups, which have frequently been out of favour lately, remained almost flat.

Despite the post-holiday blues that afflicted sentiment, Citi kicked off the autumn season with an upbeat note on the sector entitled “Everything’s gonna be alright”.

The broker said that first-half sales trends were better than expected and that second-half like-for-likes should be much better than the original consensus of a decline of between 3% and 4%.

The broker expects sales to be broadly flat next year and took a relaxed view about the likely ramifications of tax changes as an election nears. Citi maintained: “In contrast to market fears, we expect no rise in direct tax or impact from reduced government spending during 2010. VAT rising to 17.5% can be passed on; further rises are unlikely pre-election.”

Citi saw potential earnings upside in retailers ranging from the operationally geared, such as Kesa and Home Retail, to “UK-centric” groups such as Marks & Spencer and Next.

Home Retail remained on UBS’s buy list ahead of a sales update next week. UBS expects flat second-quarter like-for-likes and said: “More important than the second-quarter sales will be the read-through for the third quarter. Although the second half for Homebase is a case of loss containment, at Argos any move towards flat like-for-likes in the second quarter could see a reassessment of second-half forecasts.”

Electricals group DSGi reported “an encouraging start to the year” despite a 6% fall in group like-for-likes and declines at its core UK divisions of electricals and computing of 14% and 15% respectively. The retailer has sold its Polish business for e1.

KBC Peel Hunt took a cautious stance and said: “It is the weak UK performance that continues to take focus, as investors look for the positive signs from the transformation programme to influence headline performance.”

Singer observed: “Overall, and ahead of the all-important winter trading period and the World Cup next summer, this statement
is encouraging.”

Buy Dunelm, recommended Investec, which has upped its target price from 265p to 320p. “We believe consensus forecasts – and our own – are predicated on cautious assumptions and can see upgrade potential through 2010,” the broker explained.

Over the coming weeks a host of retailers will update, providing a sector health check as the key golden period approaches.