Consumers have feasted on discounts this holiday season, but it means thinner profit margins for retailers from Wal-Mart Stores 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 and Guess 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, 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 and Macy's, 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, Signet Jewelry and O'Reilly Automotive.
Major sellers of apparel and other goods are expected to face cost pressures throughout the final quarter. The most recent report on third-quarter gross domestic product showed a surprising increase in inventories - indicating some overly optimistic sales expectations that will have to be adjusted for through lower prices.
L Brands, the parent of Victoria's Secret, reported on Thursday that same-store sales fell 5.5 percent, while analysts were expecting a 1.1 percent decline. It said profit margins had taken a hit because of ramped up deals but would not say by how much. The company also noted that in its Victoria Secret online business it had to mark down unsold apparel.
Joel Bines, a managing director at consulting firm AlixPartners, said the clutter at some apparel retailers suggests many stores ordered more merchandise than they can easily sell and even luxury stores, which typically avoid holiday discounting, have gotten in on the action for the first time since 2008.
"It's going to hurt everyone's margins. It's a 'beggar-thy-neighbor' battle for market share,"' he said.
On Wednesday, Express shares fell as much as 24 percent in afternoon trading, making the fashion retailer the top loser on the New York Stock Exchange after it forecast a weaker-than-expected holiday quarter amid intense promotions.
Thomson Reuters data for consumer discretionary stocks shows earnings growth estimates for the fourth quarter have fallen 4.4 percentage points to 9.8 percent since Oct. 1. The overall S&P has seen its estimates fall 3.1 percentage points to 7.8 percent, but some think the consumer sector has further to go.
"Estimates look aggressive in that sector," said Adam Parker, chief U.S. equity strategist at Morgan Stanley, which has an "underweight" rating on the discretionary sector.
The S&P consumer discretionary sector group of stocks has gained 35.8 percent this year, which ranks it second among the 10 S&P sectors, trailing only health care shares. But over the last five days the discretionary sector has lost 1.1 percent versus a 0.6 percent decline in the overall S&P 500.