Investing in a Tough European Retail Environment

UK retailers took a beating Thursday as Home Retail and Carphone Warehouse struck a more pessimistic tone about the prospects of consumer spending.

So where are the attractive investments to be found in the retail sector?

"In a tough environment, you would want to stick to companies that have competitive advantage and that can maintain that over time," Luca Solca, senior research analyst at Sanford Bernstein, told CNBC Europe's "Squawk Box." "The consumer outlook is very volatile and you could argue that the market is now even discounting further bad news on the interest-rate side."

"As an investor, you would want to get into names that are sure to guarantee in the medium-to-long term the value creation potential that you are seeking. In that context, I would identify innovating companies that have significant abilities in creating useful formats and supporting those with an advantaged supply chain and product development operations," Solca said.

Solca pinpoints Spain's Inditex as one such investment opportunity. Stating that the retailer has a strong portfolio performance; huge international development potential, which is where it can spread the risk; and that today's valuation has possibly already discounted in the bad news from the Spanish consumer.

"In the broader consumer discretionary space, there are a number of luxury companies that have very strong brands; a defensible long-term face; good emerging markets demand - even in the short-term," Solca said.

LVMH and PPR were the two companies he considered good bets.

Solca told CNBC that despite the gloomy consumer outlook in the UK, there are a few recovery stories, such as home improvement retailer Kingfisher.

"As much as the home improvement outlook is difficult, you could also have to look at that against the current valuation that the stock is actually bearing and the fact that the enterprise values supported almost 80 percent, if not more, by the real estate portfolio they have on their balance sheet," he said.

© 2008 CNBC.com