According to analysts at Barclays, early and deep discounting across U.S. retail is raising alarms about a potentially difficult holiday season. Research from the bank indicates that aggressive promotional strategies, which began in late September and escalated through “Black October,” may be a sign that retailers are trading off margins in exchange for immediate sales.
Barclays suggests that the trend of early and widespread discounts could be a warning of weak consumer demand, as retailers are increasingly forced to offer larger promotions to capture consumer spending early in the season. The bank emphasizes that this could erode gross margins during the crucial holiday quarter, which is typically vital for retail profits.
The report also highlights that promotions have not only arrived earlier but have become deeper and more extensive across a range of retail categories. Barclays warns that this shift reflects a more cautious consumer outlook, with businesses attempting to accelerate sales at the expense of margins—potentially pulling sales forward from the holiday period.
Additionally, Barclays notes that retailers seem willing to sacrifice the higher margins they achieved last year in an effort to boost demand, a strategy that could result in downward pressure on both prices and margins well into 2025.
The unseasonably warm fall weather has further complicated the outlook, particularly for retailers reliant on winter apparel sales. Citi analysts also pointed out that mild temperatures have added to the challenges, exacerbating the impact of early promotions.
However, Barclays identifies a few bright spots. Foot Locker and VF Corporation are noted as “best late-cycle recovery names” that may stabilize or expand their margins in the upcoming quarters. Lululemon, meanwhile, could see an “inline to upside” quarter due to better clearance inventory, but overall, Barclays remains cautious about the U.S. retail sector as it heads into the holiday season. The outlook for the sector remains uncertain, with early discounting already taking a toll on margins.
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