By David Randall
NEW YORK (Reuters) - The strong jobs market is likely to send sales higher at retailers and restaurants but leave investors unhappy, worrying fund managers who have crowded into consumer stocks.
Wage increases, driven by higher minimum wages and greater competition for employees, are squeezing margins, forcing companies to eat higher labor costs while also investing in technology in hopes of saving money over time, investors and analysts said.
Consumer company shares fell more than 1 percent Wednesday after heavyweights Walt Disney Co and Macy's Inc missed analyst estimates and retailer Ross Stores (NASDAQ:ROST) was downgraded.
Companies ranging from hotel operator Marriott International Inc to Papa John’s International Inc to Big Five Sports Goods Corp have told analysts over the last three weeks that they are seeing an impact from higher wages, especially at entry-level positions that are the most affected by increases in the minimum wage.
Marriott told analyst it expected wage growth of 3 to 5 percent in the United States over the next couple of years, requiring the company to raise revenues per room 3 percent just to keep flat margins.
"In terms of earnings growth, it will be more difficult to identify margin expansion stories than it was a couple of years ago,” said Matt Kaufler, a portfolio manager at Federated Investors.
“We’re now looking for companies that have some good or service where they can take the price up and not harm demand,” he said, citing portfolio holdings such as Waste Management Inc (NYSE:WM).
Overall, fund managers remain overweight consumer discretionary stocks such as Home Depot Inc (NYSE:HD) and McDonald's Corp that have large workforces made up of entry-level labor. The average U.S. actively managed large cap fund now has 14.7 percent in the sector, compared with its 11.2 percent weighting in the Standard & Poor's 500 index, according to Lipper data.
There are no easy answers for consumer discretionary companies facing rising labors costs, said Peter Saleh, an analyst at BTIG. "If you wind up taking too much price, it could impact your traffic and it will impact your stock price," he said.
Some companies appear resigned to lower margins. "Our largest expense is store labor, and a significant portion of this is part-time," said Barry Emerson, chief financial officer at Big 5 Sporting Goods, on a call with analysts after the company's earnings results.
"We'll continue to evaluate that store-staffing model and try and make adjustments as we can. But ... you've got to make sure you're running the cash register. So there's an impact to the business, for sure."