Analysis: Deep discounts sound warning for U.S. retail profits

Fri Dec 6, 2013 7:05am EST
 
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By Angela Moon

NEW YORK (Reuters) - Consumers have feasted on discounts this holiday season, but it means thinner profit margins for retailers from Wal-Mart Stores Inc (WMT.N: Quote) to Neiman Marcus, and car makers, a red flag for investors who have ridden a sector rally all year.

This week, apparel retailers including Aeropostale Inc `ARO.N and Guess Inc GES.N lowered fourth-quarter earnings forecasts, and on Thursday, several major U.S. retailers posted disappointing sales for November.

"We don't have an economy that is growing very fast. Prices are coming down in most cases," Jim McNerney, head of the Business Roundtable and chief executive of airplane maker Boeing Co (BA.N: Quote), said in releasing the Roundtable's survey of chief executives on Wednesday.

"Every member of the Business Roundtable, which represents about half the U.S. economy, is facing price pressure," he added.

The discounting is expected to continue as retailers seek to hold onto market share. Shares of retailers, big winners this year, are starting to look expensive and some investors are positioning themselves to profit from a decline.

"It's troubling to some extent that while there is an increase in sales as the economy recovers, there continues to be price pressure on the retailers, especially the traditional ones," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.

Most of the major retailing sectors have seen their margins on earnings before interest expenses and taxes, or EBIT, decline from last year to the most recent quarter, according to Thomson Reuters StarMine. A group of 11 multiline retailers, including Target (TGT.N: Quote) and Macy's (M.N: Quote), have seen that margin fall to 5.2 percent from 6 percent, while the auto companies have dropped to 1.5 percent from 3.6 percent.

One notable divergence is in the specialty retailers, which includes a number of luxury goods companies, apparel names and home improvement companies. Their margin has risen to 9.8 percent from 9.2 percent, in part due to Home Depot (HD.N: Quote), Signet Jewelry (SIG.N: Quote) and O'Reilly Automotive(ORLY.O: Quote).   Continued...

 
Thanksgiving Day holiday shoppers enter the Target retail store in Chicago, Illinois, November 28, 2013. REUTERS/Jeff Haynes