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Wall Street Week Ahead: Investors focus on retailers as wages rise

Reuters  |  NEW YORK 

By Caroline Valetkevitch

(Reuters) - U.S. companies are warning about rising wages eating into profit margins, increasing investor worries that next year's expected drop in profit growth may be sharper than feared.

Amidst overall strong quarterly results, climbing labour costs are a growing concern, with more than a dozen companies in the <.SPX> mentioning them in conference calls so far this earnings season.

That is up from just a handful of companies that noted these concerns over a similar period in the year-ago quarter, an analysis of earnings calls by showed.

Next week, several retailers including and are due to report results and investors will be keen to hear what they say about labour.

Retailers and restaurants tend to have large employee bases and are expected to be among companies most likely to feel the biggest impacts of higher wages.

strategists wrote in a note this week that hotels, restaurants, retailers, and services, and IT services may be among industries most exposed to rising wages.

"Wage pressures have been building for some time, but we finally saw them really pop ... in the October jobs report, so I think that's going to continue to be an issue," said Kristina Hooper, at in

Worries about the potential for wage have been picking up as economic data has shown that U.S. labour market conditions are tightening.

Wage pressures could increasingly be an issue as earnings-per-share growth for companies is expected to slow to about 9 percent next year following 2018's tax-fuelled earnings gains, estimated at 24 percent, according to IBES data from

In the recent U.S. jobs report for October, wages recorded their largest annual gain in 9-1/2 years.

A separate report showed the Index, the broadest measure of labour costs, increased 0.8 percent in the third quarter after a 0.6 percent rise in the second quarter, putting the year-on-year rate of increase at 2.8 percent.

A record 7.14 million open jobs are unfilled, and employers have been forced to boost wages to attract employees.

said last month it would raise its to $15 per hour for U.S. employees starting in November.

Moreover, chances for a higher federal increased this week as Democrats won control of the in

Among companies that have talked about the impact of higher wages, said on the company's Oct. 23 call with analysts that labour costs were among pressures on margins in the latest quarter.

told analysts the company expects labour costs to keep rising in the fourth quarter, and executives said wage has been higher than anticipated.

In addition, Clay Williams, of , which reported quarterly revenue that missed expectations, said "and labour costs are continuing to rise, eroding margin gains from price increases across many of our businesses."

To be sure, the tax overhaul passed by in late 2017 has helped companies offset a lot of extra expenses, and third-quarter profit growth is on track to be the highest since 2010.

Lower tax rates should enable higher wages and maintainable margins without the need to raise prices, according to Russell Price, at in Troy,

strategists in a recent note said wage is among key risks to S&P 500 profit margins, along with higher tariffs and rising debt costs.

"Managements expressed confidence in their ability to offset tariff costs through price increases or supply chain reorganization. However, executives noted increased competition for labour and intensifying wage pressures," they wrote.

Some businesses, especially retailers, may need to pass along higher labour costs to maintain slim profit margins.

"When salaries do jump to levels that would cause inflation, then that could negatively impact earnings growth," said Peter Cardillo, at in

(Reporting by Caroline Valetkevitch; Editing by Alden Bentley, and Sonya Hepinstall)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Sat, November 10 2018. 03:15 IST