Concerns Over Holiday Retail Season Amid Discounting

Investing.com — Early and deep discounting across U.S. retail has sparked concerns over a challenging holiday season, according to Barclays (LON:BARC) analysts.

The bank explained that its research suggests aggressive promotional activity, which began in late September and ramped up during “Black October,” is a warning sign for retailers who are trading margins for immediate sales.

> “Early and aggressive promos forebode a weak holiday for U.S. Retail,” Barclays wrote, underscoring that the need to capture early consumer spending dollars could eat into gross margins during the critical holiday quarter.

Barclays has observed that promotions have not only started earlier but are also deeper and more widespread, spanning across most retail categories.

They believe the intensified approach to promotions likely signals cautious consumer sentiment and could “pull forward sales from the holiday quarter at the expense of gross margins,” as companies battle for consumer spending ahead of schedule.

The bank said retailers appear to be sacrificing merchandise margin recaptured last year in an effort to stimulate demand, a move that could exert long-term downward pressure on both prices and margins well into 2025.

The warm fall weather has further complicated the season’s outlook, especially for retailers reliant on winter apparel, something analysts at Citi also highlighted in a note on Wednesday.

Barclays comments that unseasonably mild temperatures have been a “headwind to companies reliant on winter apparel sales,” potentially compounding the impact of early promotions.

Still, Barclays identified potential bright spots for investors. Foot Locker (NYSE:FL) and VF Corporation (VFC) stand out as “best late-cycle recovery names” that could stabilize or expand margins over the coming quarters.

Additionally, Lululemon (NASDAQ:LULU) may be positioned to deliver an “inline to upside quarter” thanks to its improved clearance inventory, according to Barclays. However, with early discounting already biting into margins, the bank believes the outlook for U.S. retail heading into the holiday season remains uncertain.