As the holiday season approaches, retailers are stocking shelves for throngs of shoppers, but Wall Street seems to have low hopes for a profitable season.
Soaring gas and heating oil costs, rising interest rates, and an upcoming increase in minimum credit card payments could eat into consumers' discretionary cash in the coming months, analysts said.
The S&P retail index hit a five-month low earlier this week, with the overall group down more than 13 percent since its peak in July, and retail shares have taken a beating in that period.
On the New York Stock Exchange, apparel retailer Gap Inc. has fallen 23 percent since July, mid-priced department store operator Kohl's Corp. is off 20.5 percent, upscale leather goods retailer Coach Inc. has dipped 18 percent, and Federated Department Stores has slid 18 percent.
"I don't think these companies results have merited getting hit this hard, but investors are getting concerned with consumer spending as we move into the all-important Christmas season," said Joseph Beaulieu, senior stock analyst with Morningstar.
There is concern that spending, particularly by cash-strapped consumers, will be pressured by these continued high energy prices. A slowing real estate market and rising mortgage rates may also stem some buying, and the long-term economic impact from Hurricanes Katrina and Rita is still unclear.
What's more, commodity costs are on the rise, fueling inflation worries, and the ongoing war in Iraq and terror alert warnings add to the uncertainty.
"I don't see anything mitigating that, except people taking money out of homes," Beaulieu said. "The negative savings rate means most consumers won't be able to dig deeper into cash supplies."
This slumping consumer confidence is a critical concern as retailers gear up for the holiday season. Wal-Mart Stores Inc. has already vowed aggressive discounts, setting the stage for a fiercely competitive holiday season.
"I see an extremely promotional shopping environment," said Britt Beemer, head of America's Research Group, which tracks consumer trends. "I've advised my retail clients to be super aggressive Thanksgiving weekend. Retailers don't want to do it from a margin perspective, but otherwise they won't see shoppers in stores. Consumers have less money to spend and they'll take their 'less money' elsewhere."
Beemer said he's concerned about the luxury customer, who has been resilient to economic bumps over the past few years.
"There are a number of consumers I've talked to who have given money to hurricane funds in lieu of gifts." Beemer said. "Last year luxury retail was the grand slam .... If this shopper cuts back, it will send Wall Street into a spin."
Retailers with the most at risk are ones that cater to the middle-income consumer and the aspirational consumer who occasionally over-stretches his or her budget.
"Companies that do really well either minimize something like prices, or maximize something like luxury," Morningstar's Beaulieu said. "It's the companies in the middle that are going to be squeezed."